Federal Tax Considerations for Life Insurance and Annuities
An owner surrenders a policy whose cash value increases have brought it to forty thousand dollars, having paid thirty thousand in premiums. What is the tax result?
Answer and explanation
Answer: C. On surrender the owner is taxed on the excess of the amount received over the cost basis, here forty thousand less the thirty thousand of premiums paid, so ten thousand is taxable. That gain is ordinary income, not capital gain, however long the policy was held.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72
More federal tax considerations for life insurance and annuities questions
- A participant takes an eligible rollover distribution as a cheque rather than by direct transfer. What follows?
- A participating policyowner in good health wants each declared dividend to increase the amount of insurance without new underwriting. Which use fits?
- A participating policyowner wants a declared dividend to reduce the amount due at the next premium date. Which use fits?
- A policy is sold to an unrelated investor who collects the amounts received at the insured's death. How is the exclusion affected?
- A policy with a large outstanding loan lapses while gain remains in the contract. What is the tax consequence of the policy loans?
- How are amounts received by a beneficiary by reason of the insured's death generally treated for income tax?
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