Taxation on pre 1984 endowment policy

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PostPosted: Sat Feb 20, 2010 12:47 am   Post subject: Taxation on pre 1984 endowment policy  

I had a 2009 payout on an endowment policy issued in 1949. The insurance company submitted a 1099 for approx, 50% of the payout. From what I understand of the Tax Reform Act of 1984, this payout should be tax exempt due to the issue date. Did the insurance issue the 1099 in error?

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PostPosted: Sun Feb 21, 2010 3:34 am   Post subject:   

Nope, I think you are confusing an endowment contract with a modified endowment contract.



Endowment contracts, which have for the most part gone the way of the dodo, endow and pay a benefit. This benefit is completely taxable--beyond the cost basis. Whole life insurance is an endowment contract, but with a much longer term to maturity (now age 120, used to be 100 with the old 1980's mortality tables). So for someone who turns 100 this year who holds a whole life contract that endows, the money they receive beyond their cost basis will be taxable.



Modified endowment contracts were created in the 1980s as a designation given to a life insurance policy that broke a threshold for cash value with respect to death benefit--this is a very basic definition, and it can be a rather complex calculation to determine what is or isn't a modified endowment conract MEC. Modified endowment conracts have taxable consequences identical to annuities with the additional provision that even policy loans are taxable. The reform act of 1984 created MECs, and speaks specifically to them.



Now, policies issued prior to this time period can not turn into MECs, so there is an ability to place cash inside these policies--if the contracts allows it--and enjoy all the taxable benfits of ordinary life insurance.

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PostPosted: Sun Feb 21, 2010 6:01 am   Post subject:   

BNTRS I would agree with you. The reason that the endowment is taxable as to the gain is due to the fact that is WAS purchased prior to TEFRA '85 and as such, grew tax-deferred. Endowment policies, as you so eloquently stated, have pretty much gone the way of the dodo bird. The only endowment contracts you even see today are retirement income contracts, which combine a life insurance policy with an annuity. The idea of these is to use the endowment to fund the annuity if the insured lives and to pay a death benefit if the insured dies. The gain in these contracts is taxed annually.



Modified Endowment Contracts (MECs) have failed the "7-Pay" test. Let me see if I remember..."The total of premiums paid at anytime during the first seven years of the contract cannot exceed the level premiums that would have been paid by that time for a paid-up policy."



Don't forget the TEFRA tests either. The Guideline Premium and Cash Value Corridor test and the Cash Value Accumulation test. Fail those and then part of the death benefit gets taxed. Turn into a MEC and the death benefit is still tax-free.



In other words- too much premium and life insurance is not an investment. Why do people still refer to this stuff as an investment???



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PostPosted: Mon Feb 22, 2010 4:49 am   Post subject:   

Quote:
Why do people still refer to this stuff as an investment???




For the same reason people believe the home in which they live is an asset.



Or Ric Edelman's philosophy of "get the biggest mortgage you can afford, never plan to pay it off, and take the tax deduction for the interest."



It's what the uninformed have been led to believe is true by those who would take advantage of them.



We'll see what happens to Ric E. and his followers when Congress takes away the mortgage interest deduction to help cover the cost of national health care run without insurance companies.


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PostPosted: Tue Feb 23, 2010 2:12 am   Post subject:   

Sometimes they kind of have to...vul Wink

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PostPosted: Mon Jan 27, 2014 6:00 pm   Post subject: insurance endowment taxes  

Do all endowment insurance have to be taxes if you take a lump sum cash?


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PostPosted: Fri Feb 07, 2014 8:15 pm   Post subject:   

Yes. There will always be income tax due on the excess of gain over the cost basis. In other words, money out minus money in equals gain, if any.



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