Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: I have a 95 year old client whose whole life policy has matured. The company is sending the client a check. Is the money income tax free.
Code Section 101 says that the death benefit from a life insurance policy is usually income tax free. It also describes some other cases—such as chronic illness or terminal illness—under which a lifetime distribution from a life policy will be treated as an income tax free death benefit.
All other lifetime distributions of cash under a life policy are governed by the rules under Code Section 72. Sub-paragraph 5 deals with withdrawals. Here’s an excerpt with an editorial summary in the parenthesis:
(5) Retention of existing rules in certain cases
(A) In general
In any case to which this paragraph applies …
the amount (of a withdrawal) shall be included in gross income,
but only to the extent it exceeds the investment in the contract.
(C) Certain life insurance and endowment contracts
… this paragraph shall apply to any amount not received as an annuity which is
received under a life insurance or endowment contract.
Therefore, the maturity proceeds are income taxable to the extent they exceed the client’s basis.
For those clients who are nearing the maturity date on the contract, in some cases they may be able to ask the carrier to extend the maturity date to a later time. While the IRS has not definitively said that such an extension is permitted, a few carriers may allow it to help a client’s family eventually receive the tax free death benefit.
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