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Tax Planning for Annuities

Tax Planning for Annuities

Favorable tax treatment is one of the main reasons for buying an annuity. But what exactly are the tax benefits? And are there any drawbacks? It’s important to know the answers to these questions before deciding whether to purchase an annuity.

Of course, any information pertaining to taxes is complex, full of exceptions, and subject to change. This discussion deals with the general rules for taxation of annuities–you should consult a tax advisor for more specific information before you take any action.

Taxation of premiums

Annuities are typically funded with after-tax dollars. So, the money you pay into an annuity (in the form of premiums) is nondeductible. By placing funds in an annuity, you will not realize any current income tax savings, unlike putting money into a traditional IRA, 401(k) plan, or other employer-sponsored retirement plan.

Tax-deferred growth

Unlike most investments, an increase in the value of an annuity from interest is not currently taxable. Generally, annuity funds are allowed to grow tax deferred until they’re distributed, at which time the owner will pay ordinary income tax on all gains.

Taxation of premature withdrawals

Withdrawals taken before age 59½ may be subject to a 10 percent IRS penalty tax unless an exception applies. When you make a withdrawal from an annuity, the IRS assumes that earnings are withdrawn first. The 10 percent penalty applies to the earnings portion of a withdrawal. So, early withdrawals are costly from a tax standpoint.

For example, if your annuity has grown by $1,000 since you purchased it, a $500 withdrawal would be considered 100 percent interest and would be subject to the 10 percent penalty–in this case, $50. In addition, because the entire withdrawal represents earnings, it would be subject to ordinary income tax. If you are in the 25 percent tax bracket, your income tax liability on the withdrawal would be $125. Adding this to the early withdrawal penalty, $175 of your $500 withdrawal would end up in the IRS’s pocket.

Taxation of scheduled distributions

If you choose an annuitization option, you will begin receiving regular distributions from your annuity over a predetermined period of time. Each distribution consists of two components: principal (a return of the money you paid into the annuity) and earnings. The percentages of principal and earnings of each distribution will depend on the annuitization option chosen. Again, the earnings portion of each distribution will be treated as ordinary income. Also, depending on the annuitization option chosen, the 10 percent penalty rule may not apply.

Note: Annuity guarantees are subject to the claims-paying ability of the annuity issuer.

Taxation of lump-sum distributions

Taking a lump-sum distribution of your annuity funds can have many consequences. If you make this election within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. In any case, the earnings portion of the distribution will be treated as ordinary income in the year you take the distribution. Also, keep in mind that a large lump-sum distribution could actually push you into a higher tax bracket, dramatically increasing your tax liability.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions

Tax Planning for Annuities

Tax Planning for Annuities

Favorable tax treatment is one of the main reasons for buying an annuity. But what exactly are the tax benefits? And are there any drawbacks? It’s important to know the answers to these questions before deciding whether to purchase an annuity.

Of course, any information pertaining to taxes is complex, full of exceptions, and subject to change. This discussion deals with the general rules for taxation of annuities–you should consult a tax advisor for more specific information before you take any action.

Taxation of premiums

Annuities are typically funded with after-tax dollars. So, the money you pay into an annuity (in the form of premiums) is nondeductible. By placing funds in an annuity, you will not realize any current income tax savings, unlike putting money into a traditional IRA, 401(k) plan, or other employer-sponsored retirement plan.

Tax-deferred growth

Unlike most investments, an increase in the value of an annuity from interest is not currently taxable. Generally, annuity funds are allowed to grow tax deferred until they’re distributed, at which time the owner will pay ordinary income tax on all gains.

Taxation of premature withdrawals

Withdrawals taken before age 59½ may be subject to a 10 percent IRS penalty tax unless an exception applies. When you make a withdrawal from an annuity, the IRS assumes that earnings are withdrawn first. The 10 percent penalty applies to the earnings portion of a withdrawal. So, early withdrawals are costly from a tax standpoint.

For example, if your annuity has grown by $1,000 since you purchased it, a $500 withdrawal would be considered 100 percent interest and would be subject to the 10 percent penalty–in this case, $50. In addition, because the entire withdrawal represents earnings, it would be subject to ordinary income tax. If you are in the 25 percent tax bracket, your income tax liability on the withdrawal would be $125. Adding this to the early withdrawal penalty, $175 of your $500 withdrawal would end up in the IRS’s pocket.

Taxation of scheduled distributions

If you choose an annuitization option, you will begin receiving regular distributions from your annuity over a predetermined period of time. Each distribution consists of two components: principal (a return of the money you paid into the annuity) and earnings. The percentages of principal and earnings of each distribution will depend on the annuitization option chosen. Again, the earnings portion of each distribution will be treated as ordinary income. Also, depending on the annuitization option chosen, the 10 percent penalty rule may not apply.

Note: Annuity guarantees are subject to the claims-paying ability of the annuity issuer.

Taxation of lump-sum distributions

Taking a lump-sum distribution of your annuity funds can have many consequences. If you make this election within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. In any case, the earnings portion of the distribution will be treated as ordinary income in the year you take the distribution. Also, keep in mind that a large lump-sum distribution could actually push you into a higher tax bracket, dramatically increasing your tax liability.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions

Tax Planning Tips: Life Insurance

Tax Planning Tips: Life Insurance

Understanding the importance of life insurance is one thing. Understanding the tax rules is quite another. As insurance products have evolved and become more sophisticated, the line separating insurance vehicles from investment vehicles has grown blurry. To differentiate between the two, a mix of complex rules and exceptions now governs the taxation of insurance products. If you have neither the time nor the inclination to decipher the IRS regulations, here are some life insurance tax tips and background information to help you make sense of it all.

Life insurance contracts must meet IRS requirements

For federal income tax purposes, an insurance contract cannot be considered a life insurance contract–and qualify for favorable tax treatment–unless it meets state law requirements and satisfies the IRS’s statutory definitions of what is or is not a life insurance policy. The IRS considers the type of policy, date of issue, amount of the death benefit, and premiums paid. The IRS definitions are essentially tests to ensure that an insurance policy isn’t really an investment vehicle. The insurance company must comply with these rules and enforce the provisions.

Keep in mind that you can’t deduct your premiums on your federal income tax return

Because life insurance is considered a personal expense, you can’t deduct the premiums you pay for life insurance coverage.

Employer-paid life insurance may have a tax cost

The premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group term life insurance plan does not have to be reported as income and is not taxed to you. However, amounts in excess of $50,000 paid for by your employer will trigger a taxable income for the “economic value” of the coverage provided to you.

You should determine whether your premiums were paid with pre- or after-tax dollars

The taxation of life insurance proceeds depends on several factors, including whether you paid your insurance premiums with pre- or after-tax dollars. If you buy a life insurance policy on your own or through your employer, your premiums are probably paid with after-tax dollars.

Different rules may apply if your company offers the option to purchase life insurance through a qualified retirement plan and you make pretax contributions. Although pretax contributions offer certain income tax advantages, one tradeoff is that you’ll be required to pay a small tax on the economic value of the “pure life insurance” in the policy (i.e., the difference between the cash value and the death benefit) each year. Also, at death, the amount of the policy cash value that is paid as part of the death benefit is taxable income. These days, however, not many companies offer their employees the option to purchase life insurance through their qualified retirement plan.

Your life insurance beneficiary probably won’t have to pay income tax on death benefit received

Whoever receives the death benefit from your insurance policy usually does not have to pay federal or state income tax on those proceeds. So, if you die owning a life insurance policy with a $500,000 death benefit, your beneficiary under the policy will generally not have to pay income tax on the receipt of the $500,000. This is generally true regardless of whether you paid all of the premiums yourself, or whether your employer subsidized part or all of the premiums under a group term insurance plan.

Different income tax rules may apply if the death benefit is paid in installments instead of as a lump sum. The interest portion (if any) of each installment is generally treated as taxable to the beneficiary at ordinary income rates, while the principal portion is tax free.

In some cases, insurance proceeds may be included in your taxable estate

If you hold any incidents of ownership in an insurance policy at the time of your death, the proceeds from that insurance policy will be included in your taxable estate. Incidents of ownership include the right to change the beneficiary, the right to take out policy loans, and the right to surrender the policy for cash. Furthermore, if you gift away an insurance policy within three years of your death, then the proceeds from that policy will be pulled back into your taxable estate. To avoid having the policy included in your taxable estate, someone other than you (e.g., a beneficiary or a trust) should be the owner.

Note: If the owner, the insured, and the beneficiary are three different people, the payment of death benefit proceeds from a life insurance policy to the beneficiary may result in an unintended taxable gift from the owner to the beneficiary.

If your policy has a cash value component, that part will accumulate tax deferred

Unlike term life insurance policies, some life insurance policies (e.g., permanent life) have a cash value component. As the cash value grows, you may ultimately have more money in cash value than you paid in premiums. Generally, you are allowed to defer income taxes on those gains as long as you don’t sell, withdraw from, or surrender the policy. If you do sell, surrender, or withdraw from the policy, the difference between what you get back and what you paid in is taxed as ordinary income.

You usually aren’t taxed on dividends paid

Some policies, known as participating policies, pay dividends. An insurance dividend is the amount of your premium that is paid back to you if your insurance company achieves lower mortality and expense costs than it expected. Dividends are paid out of the insurer’s surplus earnings for the year. Regardless of whether you take them in cash, keep them on deposit with the insurer, or buy additional life insurance within the policy, they are considered a return of premiums. As long as you don’t get back more than you paid in, you are merely recouping your costs, and no tax is due. However, if you leave these dividends on deposit with your insurance company and they earn interest, the interest you receive should be included as taxable interest income.

Watch out for cash withdrawals in excess of basis–they’re taxable

If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken. Any withdrawals in excess of your basis (gain) will be taxed as ordinary income. However, if the policy is classified as a modified endowment contract (MEC) (a situation that occurs when you put in more premiums than the threshold allows), then the gain must be withdrawn first and taxed.

Keep in mind that if you withdraw part of your cash value, the death benefit available to your survivors will be reduced.

You probably won’t have to pay taxes on loans taken against your policy

If you take out a loan against the cash value of your insurance policy, the amount of the loan is not taxable (except in the case of an MEC). This result is the case even if the loan is larger than the amount of the premiums you have paid in. Such a loan is not taxed as long as the policy is in force.

If you take out a loan against your policy, the death benefit and cash value of the policy will be reduced.

You can’t deduct interest you’ve paid on policy loans

The interest you pay on any loans taken out against the cash value of your life insurance is not tax deductible. Certain loans on business-owned policies are an exception to this rule.

The surrender of your policy may result in taxable gain

If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal (and possibly state) income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out (plus any loans outstanding) and your basis in the policy. Your basis is the total premiums that you paid in cash, minus any policy dividends and tax-free withdrawals that you made.

You may be able to exchange one policy for another without triggering tax liability

The tax code allows you to exchange one life insurance policy for another (or a life insurance policy for an annuity) without triggering current tax liability. This is known as a Section 1035 exchange. However, you must follow the IRS’s rules when making the exchange.

When in doubt, consult a professional

The tax rules surrounding life insurance are obviously complex and are subject to change. Contact us today for your complimentary consultation, and one of our qualified financial advisors can help.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Planning Ahead for Life Insurance Proceeds

Planning Ahead for Life Insurance Proceeds

Why did you purchase life insurance? If you’re like most people who buy life insurance, you’re looking to provide a source of income for someone (e.g., a spouse, parent, or child) after you die. Buying the policy was the first step. Now you’ll need to do a little more work to ensure that the money you leave behind lasts.

You can never leave too much. or can you?

First, make sure what you’ll leave behind is enough. Review your insurance needs annually, or more often if necessary. After a major life event, it is also a good idea to review your coverage. If you think that you may need more life insurance or that you have too much, talk to your insurance professional. They can advise you on the right amount of insurance for your situation. Remember that you’re planning for your family’s future.

Also, if you’ve chosen a cash value life insurance policy that allows you to make investment decisions, you may want some advice from an accountant. Or, from an investment advisor, or a financial professional. These experts can show you how to allocate your cash value account so that it fits in with your overall financial plan.

Can we talk?

If you’ve bought life insurance to ensure a bright future for your children, sit them down and talk about it. It’s always a good idea to talk to your children about the value of money. However, serious talks about life insurance proceeds and the family estate should wait until they’re older. Eighteen is probably a good age, or slightly younger if you think your youngsters are mature enough to handle it. Although you don’t want to dwell on the fact that Mom and Dad won’t always be around, you do want to make them understand:

  • How much money they’ll receive at your death. Or, at least that there will be sufficient funds for them to carry on, go to college, and so on
  • Who will be in charge of it
  • When it will be accessible and for what purposes
  • What restrictions will be set in place
  • Why all this planning is necessary

Do you have specific desires as to how you want the money to be spent? Explain your reasons. You may find that your children want to respect your wishes instead of trying to find ways around them. If you have young children, you’ll need to appoint a guardian(s) in your will to care for them and manage their assets. This is in case something should happen to you and/or your spouse. Small children won’t understand all of the financial lingo, and you don’t want to frighten them with talk of death. So, talk to the person(s) you have chosen as guardian(s) about your plans and wishes.

Did you name your spouse, a parent, or someone else as a beneficiary? Talk to them now. Don’t wait until a crisis arises. Among other things, you’ll want to discuss how the insurance proceeds might be invested and what they should be used for. You should also talk about any financial plans you’ve already made. Also tell them what life insurance policies you have and where all the important paperwork is located. That way, your beneficiaries will be prepared when the time comes.

Revocable and irrevocable trusts

If you’re concerned about your beneficiaries’ spending habits, or that they might need help managing their inheritance, a trust may be the appropriate tool for you. A trust is a legal agreement in which you appoint a person or institution, called the trustee, to manage certain property for the benefit of one or more beneficiaries. Your attorney can help you set one up. If the right type of trust is used, this can be an excellent way to plan for your beneficiary’s financial future.

Two basic types of trusts are used in conjunction with life insurance: revocable trusts and irrevocable life insurance trusts (ILITs).

Revocable Trust

Revocable trusts come in many varieties and can be used for many purposes. These type of trusts allow you to retain control over the trust and its assets. As well, even to terminate the trust if you so choose. You would generally name yourself as the trustee of a revocable trust while you’re alive. You would then appoint someone else as a successor trustee to carry out your wishes after you die. The trustee is legally obligated to pay out the proceeds of the insurance policy, and any other assets in the trust, as specified in the trust agreement. The benefit to you is knowing that your wishes will be carried out. Your beneficiaries won’t be able to get around the trust agreement. The downside for you is that your estate will have to include assets in a revocable trust when calculating estate taxes.

Irrevocable Life Insurance Trust

With an ILIT, however, you’ll enjoy certain tax benefits. The insurance proceeds and other assets in the trust aren’t considered part of your taxable estate. You don’t want your estate to pay unnecessary taxes, because this decreases the amount your heirs will ultimately receive. However, you must give up all rights and control over the trust. You can’t act as the trustee or make any decisions about how assets are invested. If it appears that you have influence over the trustee, or that the trustee is carrying out your wishes, the ILIT will be added back into your estate tax calculation. If you have a sizable estate, you may be able to minimize the potential tax burden with an ILIT.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Should You Buy Long-Term Care Insurance?

Should You Buy Long-Term Care Insurance?

The longer you live, the greater the chances you’ll need some form of long-term care. If you’re concerned about protecting your assets and maintaining your financial independence in your later years, long-term care insurance (LTCI) may be for you.

Who needs it?

According to the Administration on Aging, approximately 18 percent of Americans age 85 or older live in nursing homes. (Source: A Profile of Older Americans, 2006.) And with life expectancies increasing at a steady rate, this figure can be expected to grow in the years to come.

But won’t the government look out for me?

Medicare pays nothing for nursing home care unless you’ve first been in the hospital for 3 consecutive days. After that, it will pay only if you enter a certified nursing home within 30 days of your discharge from the hospital. For the first 20 days, Medicare pays 100 percent of your nursing home care costs. After that, you’ll pay $128 per day (in 2008) for your care through day 100, and Medicare will pick up the balance. Beyond day 100 in a nursing home, you’re on your own–Medicare doesn’t pay anything.

If you’re at home, Medicare provides minimal short-term coverage for intermediate care (e.g., intravenous feeding or the treatment of dressings), but only if you’re confined to your home and the treatments are ordered by a doctor. Medicare provides nothing for custodial care, such as help with feeding, bathing, or preparing meals.

Medicaid covers long-term nursing home costs (including both intermediate and custodial care costs) but only for individuals who have low income and few assets (eligibility guidelines vary from state to state). You will have to use up most of your savings before you qualify for Medicaid, and aside from a small personal needs allowance (typically $30 to $60 dollars a month), you will have to use all of your retirement income, including Social Security and pension payments, to pay for your care before Medicaid pays anything. And once you qualify for Medicaid, you’ll have little or no choice regarding where you receive care. Only facilities with Medicaid-approved beds can accept you, and your chances of staying in your own home are slimmer, because currently most states’ Medicaid programs only cover limited home health care services.

Looking out for yourself

If you want to retain your independence, protect your assets, and maintain your standard of living while at the same time guaranteeing your access to a range of long-term care options, you may want to purchase LTCI. This insurance might be right for you if you meet the following criteria:

  • You have significant assets that you would want to preserve as an inheritance for others or gift to charity
  • You have an income from employment or investments in addition to Social Security
  • You’re between the ages of 40 and 84
  • You can afford LTCI premiums (now and in the future) without changing your lifestyle

Once you purchase an LTCI policy, your premiums can go up over time, but the rates can only rise for an entire class of policyholders in your state (i.e., all policyholders who bought a particular policy series, or who were within certain age groups when they bought the policy). Any increase must be justified and approved by your state’s insurance division.

Factors to consider

Several factors affect the cost of your long-term care policy. The most significant factors are your age, your health, the amount of benefit, and the benefit period. The younger and healthier you are when you buy LTCI, the less your premium rate will be each year. The greater your daily benefit (choices typically range from $50 to $350) and the longer the benefit period (generally 1 to 6 years, with some policies offering a lifetime benefit), the greater the premium.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Tax Planning Tips: Life Insurance

Tax Planning Tips: Life Insurance

Understanding the importance of life insurance is one thing. Understanding the tax rules is quite another. As insurance products have evolved and become more sophisticated, the line separating insurance vehicles from investment vehicles has grown blurry. To differentiate between the two, a mix of complex rules and exceptions now governs the taxation of insurance products. You may not have neither the time nor the inclination to decipher the IRS regulations. Here are some life insurance tax tips and background information to help you make sense of it all.

Life insurance contracts must meet IRS requirements

For federal income tax purposes, an insurance contract cannot be considered a life insurance contract–and qualify for favorable tax treatment–unless it meets state law requirements and satisfies the IRS’s statutory definitions of what is or is not a life insurance policy. The IRS considers the type of policy, date of issue, amount of the death benefit, and premiums paid. The IRS definitions are essentially tests to ensure that an insurance policy isn’t really an investment vehicle. The insurance company must comply with these rules and enforce the provisions.

Keep in mind that you can’t deduct your premiums on your federal income tax return

Because life insurance is considered a personal expense, you can’t deduct the premiums you pay for life insurance coverage.

Employer-paid life insurance may have a tax cost

The premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group term life insurance plan does not have to be reported as income and is not taxed to you. However, amounts in excess of $50,000 paid for by your employer will trigger a taxable income for the “economic value” of the coverage provided to you.

You should determine whether your premiums were paid with pre- or after-tax dollars

The taxation of life insurance proceeds depends on several factors. Including whether you paid your insurance premiums with pre- or after-tax dollars. If you buy a life insurance policy on your own or through your employer, your premiums are probably paid with after-tax dollars.

Different rules may apply if your company offers the option to purchase life insurance through a qualified retirement plan and you make pretax contributions. Pretax contributions offer certain income tax advantages. One tradeoff is that you’ll be required to pay a small tax on the economic value of the “pure life insurance” in the policy each year. Also, at death, the amount of the policy cash value that is paid as part of the death benefit is taxable income. These days, however, not many companies offer their employees the option to purchase life insurance through their qualified retirement plan.

Your life insurance beneficiary probably won’t have to pay income tax on death benefit received

Whoever receives the death benefit from your insurance policy usually does not have to pay federal or state income tax on those proceeds. Say that you die owning a life insurance policy with a $500,000 death benefit. Your beneficiary under the policy will generally not have to pay income tax on the receipt of the $500,000. This is generally true. Regardless of whether you paid all of the premiums yourself, or whether your employer subsidized part or all of the premiums under a group term insurance plan.

Different income tax rules may apply if the death benefit is paid in installments instead of as a lump sum. The interest portion of each installment is generally treated as taxable to the beneficiary at ordinary income rates, while the principal portion is tax free.

In some cases, insurance proceeds may be included in your taxable estate

If you hold any incidents of ownership in an insurance policy at the time of your death, the proceeds from that insurance policy will be included in your taxable estate. Incidents of ownership include the right to change the beneficiary, the right to take out policy loans, and the right to surrender the policy for cash. Furthermore, if you gift away an insurance policy within three years of your death, then the proceeds from that policy will be pulled back into your taxable estate. To avoid having the policy included in your taxable estate, someone other than you (e.g., a beneficiary or a trust) should be the owner.

Note: If the owner, the insured, and the beneficiary are three different people, the payment of death benefit proceeds from a life insurance policy to the beneficiary may result in an unintended taxable gift from the owner to the beneficiary.

If your policy has a cash value component, that part will accumulate tax deferred

Unlike term life insurance policies, some life insurance policies have a cash value component. As the cash value grows, you may ultimately have more money in cash value than you paid in premiums. Generally, you are allowed to defer income taxes on those gains. As long as you don’t sell, withdraw from, or surrender the policy. If you do sell, surrender, or withdraw from the policy, the difference between what you get back. As well as what you paid in is taxed as ordinary income.

You usually aren’t taxed on dividends paid

Some policies, known as participating policies, pay dividends. An insurance dividend is the amount of your premium that is paid back to you if your insurance company achieves lower mortality and expense costs than it expected. Dividends are paid out of the insurer’s surplus earnings for the year. Regardless of whether you take them in cash, keep them on deposit with the insurer, or buy additional life insurance within the policy, they are considered a return of premiums. As long as you don’t get back more than you paid in, you are merely recouping your costs. Likely, no tax is due. However, if you leave these dividends on deposit with your insurance company and they earn interest, the interest you receive should be included as taxable interest income.

Watch out for cash withdrawals in excess of basis–they’re taxable

If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken. Any withdrawals in excess of your basis (gain) will be taxed as ordinary income. However, if the policy is classified as a modified endowment contract (MEC), then the gain must be withdrawn first and taxed.

Keep in mind that if you withdraw part of your cash value, the death benefit available to your survivors will be reduced.

You probably won’t have to pay taxes on loans taken against your policy

If you take out a loan against the cash value of your insurance policy, the amount of the loan is not taxable. This result is the case even if the loan is larger than the amount of the premiums you have paid in. Such a loan is not taxed as long as the policy is in force. If you take out a loan against your policy, the death benefit and cash value of the policy will be reduced.

You can’t deduct interest you’ve paid on policy loans

The interest you pay on any loans taken out against the cash value of your life insurance is not tax deductible. Certain loans on business-owned policies are an exception to this rule.

The surrender of your policy may result in taxable gain

If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out and your basis in the policy. Your basis is the total premiums that you paid in cash, minus any policy dividends and tax-free withdrawals that you made.

You may be able to exchange one policy for another without triggering tax liability

The tax code allows you to exchange one life insurance policy for another without triggering current tax liability. This is known as a Section 1035 exchange. However, you must follow the IRS’s rules when making the exchange.

When in doubt, consult a professional

The tax rules surrounding life insurance are obviously complex and are subject to change. Contact us today for a complimentary consultation!

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.