Advanced Underwriting Consultants

Question of the Day – November 16

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: Are life insurance cash values exempt from tax claims by the IRS?

Answer: No.  Although life insurance and annuity cash values can be exempt form the claims of creditors under relevant state law, those protections do not extend to the claims of the IRS.

Under Section 6321 of the Revenue Code, the IRS can reach the cash value of a life insurance policy to satisfy the policyowner’s tax liability.  Likewise, the IRS can reach the values in a nonqualified annuity in the same manner.  The IRS’s levy against the policy’s cash value will be treated as a taxable distribution to the policyowner.

On the other hand, the death proceeds of a life insurance policy are generally exempt from the claims of the insured’s creditors, if the insured owned the policy and the proceeds are paid to a named beneficiary.  However, a death benefit received by the beneficiary will not usually be exempt from the claims of the beneficiary’s creditors.

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.