Federal Tax Considerations for Life Insurance and Annuities
A policy with a large outstanding loan lapses while gain remains in the contract. What is the tax consequence of the policy loans?
Answer and explanation
Answer: B. On lapse or surrender the outstanding debt is treated as received by the owner, which can produce taxable income even though no cash changes hands. The debt is neither forgiven tax free nor deductible, and only the excess over basis is taxed.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72
More federal tax considerations for life insurance and annuities questions
- How is the interest an individual pays on personal policy loans generally treated?
- On what basis are dividends paid under a participating whole life policy?
- What is the tax effect of a properly executed section 1035 exchange?
- When a permanent policy is surrendered for cash, how is the taxable portion of the surrender proceeds calculated?
- Which of these is a permitted exchange under section 1035?
- Why is a direct trustee-to-trustee transfer usually preferred to a sixty day rollover?
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