Federal Tax Considerations for Life Insurance and Annuities
How are policy loans from a life insurance contract that is not a modified endowment contract generally treated for income tax?
Answer and explanation
Answer: C. A loan against a life policy is a debt, not a distribution, so it produces no income while the contract stays in force. The position changes if the policy lapses or is surrendered with the loan outstanding, when the debt counts toward the amount received.Source: 26 U.S.C. § 72 — 26 U.S.C. § 72
More federal tax considerations for life insurance and annuities questions
- A death benefit is excluded from the beneficiary's income. Does that settle the position for estate tax as well?
- 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?
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