One of the important considerations in many financial transactions is the tax treatment the transaction is given. Often, the impact of taxation is a consideration in the purchase of life insurance every bit as much as it applies to stock purchases, bond purchases and the establishment of qualified retirement plans.

In this course we will look at the tax treatment given proceeds from life insurance policies and will consider the taxation of death benefits, cash value withdrawals, loans and surrenders. In addition, we will examine the differences in tax treatment caused by a life insurance policy’s:

• Failure to meet the statutory definition of life insurance
• Being deemed a modified endowment contract
• Transfer of ownership to another person for a valuable consideration
• Sale in a viatical or life settlement transaction
• Ownership by an employer
• Use in a qualified retirement plan

Learning Objectives

When you have completed this course, you should be able to:

• Calculate the gain to be recognized as a result of various life insurance policy transactions, including –
  • withdrawals
  • loans
  • surrenders
  • payment of death benefits
• Identify the changes to the customary tax treatment of life insurance policy living proceeds resulting from the policy being deemed a modified endowment contract (MEC)
• Calculate the reportable gain upon receipt of life insurance policy death benefits when the life insurance policy –
  • has been transferred for a valuable consideration, or
  • was included in a qualified plan
• Recognize the types of life insurance exchanges that are tax-free under IRC §1035;
• Define the terms “terminally-ill” and “chronically-ill” as used in the Health Insurance Portability and Accountability Act
• Identify the income tax treatment of accelerated death benefits, viatical settlements and life settlements