Advanced Underwriting Consultants

Question of the Day – April 4

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  One of my clients is thinking about buying a life insurance policy that has an accelerated death benefit feature for chronic illness.  Would the benefits paid under such a rider be income tax free?

Answer:  Usually yes.  It’s impossible to give a definitive general answer, because the provisions of the rider and the condition of the insured at the time of claim may affect the result.  Also, if the policy is owned by someone other than the insured, the benefit is probably NOT income tax free.

Section 101 of the Internal Revenue Code says that life insurance death proceeds are usually income tax free.  Section 101(g) goes on to say that life insurance benefits paid will be treated like tax-free death proceeds if paid to a chronically ill insured.  Where the insured is the owner of the contract, it seems clear that the benefits triggered by chronic illness are tax free when paid to the insured up to $320/day in 2013, or actual long term care expenses if greater.

The same subsection goes on to define chronic illness in the same way that it’s defined under qualified long term care contracts.  An insured is considered chronically ill if unable to perform two activities of daily living (ADLs) or if the insured is suffering from a severe cognitive impairment.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.