Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘term life insurance’

Entering the Retirement Income Game? What About Universal Life?

Posted by William Byrnes on January 15, 2014


A new product feature has emerged to help clients looking to supplement retirement income or protect against the risk of outliving their assets, and, in an unusual twist, this feature is not attached to an annuity.  Insurance carriers have thrown universal life insurance policies into the retirement income game by offering accelerated benefit riders that make it easier than ever for clients to access the value of their policies.

For clients looking to secure life insurance protection, longevity insurance, and a steady stream of retirement income, these new guaranteed income withdrawal riders could be the perfect solution!

Read the full analysis of Professor William Byrnes and Robert Bloink at Think Advisor !

Professor William Byrnes is a full time academic providing unbiased, informative critique to his readers.  Subscribers of Tax Facts and of National Underwriters receive weekly strategic industry intelligence such as retirement strategies and client case studies.  ThinkAdvisor.com, an industry news site, supports the professional growth and vitality of the Investment Advisory community, from RIAs and wealth managers of all kinds, to independent broker-dealer and wirehouse representatives. We provide unparalleled access to the knowledge, information and critical resources they need to succeed at every stage in their career, including professional development, education and certification, industry news and analysis, reference tools and services, and community networking opportunities.

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Gifting Life Insurance Policies: Not a Simple Matter

Posted by William Byrnes on October 17, 2013


Making a gift of a life insurance policy can prove to be anything but simple for clients who may not know what questions to ask in order to ascertain the potential tax consequences of the transaction. Transferring a policy that is subject to a policy loan can prove even more problematic, even if the transferee is a family member and the transfer is intended entirely as a gift.

Though the rule’s name might suggest otherwise, the transfer for value rule can create a serious tax trap for a client who transfers a life insurance policy, even if nothing tangible actually changes hands in the transaction.   Want to read more?  Open access content at Think Advisor!

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Term Life: An better option for clients?

Posted by William Byrnes on September 12, 2013


Advisors who think they know all there is to know about term life insurance might be surprised to learn that these policies are finally being brought up to speed.

Increasing demand for already popular term life policies has insurance companies jumping to differentiate their products in a crowded market. The result is a new generation of term life products that can be customized to meet the needs of an extremely diverse section of the market.

Whether your clients are concerned about covering education costs or providing enhanced benefits in the case of specific accidents, modern term life insurance might be the solution.  … Read this full analysis by William Byrnes at  > LifeHealthPro <

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The Value of Variable Life Insurance: Surrender Charges and Fair Market Value

Posted by William Byrnes on July 25, 2013


The U.S. Court of Appeals for the Ninth Circuit recently affirmed the Tax Court’s position on the use of surrender charges in the valuation equation when a nonqualified employee benefit plan that holds a life insurance policy distributes that policy to a taxpayer upon winding up of the plan.

When these life insurance policies are distributed to the taxpayer-employees under such a plan, the taxpayers are responsible for paying taxes on the value of the policies. According to the IRS, the policy value equals the cash value of the policy without regard to any surrender charges. So what do your clients have to include in income if the actual cash surrender value of their life insurance policy is negative?

The Facts

Read the full analysis at ThinkAdvisor – http://www.thinkadvisor.com/2013/05/28/the-value-of-variable-life-insurance-surrender-cha

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New York Holds Carrier Can’t Deny Term Conversion for Settlement

Posted by William Byrnes on July 26, 2011


The New York Department of Insurance, Office of General Counsel, stated on February 25, 2011 that insurance carriers cannot refuse to convert a term policy to a permanent policy on the ground that the policy will be sold on the secondary market. The debated issue was whether the converted policy is a “new” policy that must satisfy the insurable interest requirement. Nevertheless, this ruling will not affect all term policies, since many term life insurance policies are not convertible. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Pricing Stability of Life Insurance

Posted by William Byrnes on April 4, 2011


Last month, we discussed the obvious relevance of pricing competitiveness to overall life insurance product suitability. This month, we discuss the stability of pricing representations which is also a factor of suitability.  After all, pricing that appears competitive at the time of sale/purchase but which cannot be maintained can be worse than a less-competitive product with more stable pricing representations.

For instance, while premiums are often considered the price/cost of a life insurance policy, the premium is not the price/cost of a life insurance policy (unless contractually guaranteed like in term life insurance or guaranteed universal life insurance) any more than the $2,000 contributed to an Individual Retirement Account (IRA) is the cost of the IRA. In both cases, the cost is the sum of what is deducted from the premium/contribution.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of suitability in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90)Financial Strength and Claims-Paying Ability (CC 10-115)Cost Competitiveness of Life Insurance (CC 11-11).

 

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Group-Term Life Policy Tax Consequences

Posted by William Byrnes on February 25, 2011


The Internal Revenue Code provides an exclusion from income for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. [1] Thus, there are no tax consequences to the individual if the total amount of such policies does not exceed $50,000.  However, the imputed cost of coverage in excess of $50,000 must be included in income to the individual, using the IRS Premium Table[2] and are subject to social security and Medicare taxes.

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:

  1. The employer pays any cost of the life insurance, or
  2. The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (known as the “straddle” rule).

A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee.  Also, because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.

Read the analysis at AdvisorFYI

 

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Cancellation of a Policy Generates Taxable Income: The Sanders Case

Posted by William Byrnes on January 19, 2011


Life insurance policies are granted preferred tax treatment, with death benefits distributable tax-free to beneficiaries, but some distributions from a life insurance policy are subject to income tax. For instance, although inside buildup of policy value occurs tax-free, when that value is tapped through policy withdrawals, the policy owner may be taxed on the distribution. Current income taxation can also result when a policy is cancelled or otherwise terminated when a policy loan is outstanding, as illustrated by a recent Tax Court case.

For previous coverage of life insurance developments in Advisor’s Journal, see Life Insurance: Iron-Clad Asset Protection or Chink in the Armor? (CC 10-114) and IRS Blesses Life Insurance Policy Held by Profit-Sharing Plan (CC 10-96).  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of policy loans and withdrawals, see Advisor’s Main Library: Section 19.1 G—Tax Treatment Of Policy Loan Interest and Section 19.1 C—Taxation of Amounts Payable During Life.

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Insurers Accused of Wrongfully Refusing to Pay Death Benefits

Posted by William Byrnes on December 14, 2010


Insurance companies have been getting a lot of press the last few years. But this time, it’s not a story about a health insurance carrier denying a father-of-five cancer patient’s potentially life-saving treatment. It’s a Los Angeles Times story pillorying life insurance company American General and several other carriers for rescinding life insurance policies after the insured’s death.

According to the Los Angeles Times article, $372 million in life insurance benefits were denied beneficiaries in 2009, doubling over the past decade even as life insurance policy sales have decreased.

The article breaks down the denied death benefits by insurance company, finding that some carriers deny death benefits more than others. The prime target …… read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of a life insurance company’s right to rescind a policy after issuance, see Advisor’s Main Library: Section 20 C—Payment Of Proceeds.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

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Employer Owned Life Insurance and Notice 2009-48

Posted by William Byrnes on November 29, 2010


President James A. Garfield's $10,000 life ins...

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Why is this Topic Important to Wealth Managers? Provides an update for wealth managers into the status of employer owned life insurance.  Discusses two notable exceptions to the general rule including income from the death benefits of an insurance policy when paid to a trade or business.

In 2006, Congress added Section 101(j) to the Internal Revenue Code which addresses the taxation of employer owned life insurance (EOLI) under Section 863 of the Pension Protection Act.  The law departed from the traditional status of life insurance proceeds payable by death of the insured as excluded from gross income. [1]

Section 101(j) essentially taxes life insurance proceeds payable at death, in the amount over contributions or basis, when the policy is owned by a trade or business, where the employer is the beneficiary, and the employee is the insured. [2] There are a certain number of exceptions where the benefit payable to the beneficiary will remain excludable.  [3] In all of the exceptional situations notice and consent requirements must be met. [4] For a discussion on the notice requirements specifically, or Section 101(j) generally, please see AdvisorFX: Death Benefits Under Employer Owned Life Insurance Contracts[5]

Since the enactment of law, the Service has issued guidance in regards to what transactions may be allowed under section 101(j).  That guidance came in part, last year when the Service published Notice 2009-48.

How do some of the exceptions work in consideration of the guidance published in Notice 2009-48?  Read our entire analysis and citations at AdvisorFYI.

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Key Employee Life Insurance and the Transfer for Value Rule

Posted by William Byrnes on November 16, 2010


Why is this Topic Important to Wealth Managers?  Discusses a basic deferred compensation plan available to many small businesses seeking to retain key personnel.  Provides discussion on common transactions as well as expected tax consequences.

Key employee insurance generally means “a life insurance policy owned by and payable to a business that insures the lives…of employees whose deaths would cause a significant economic loss to the business, upon whose skills talents, experience or business or personal contacts the business is dependent, and who would be difficult to replace.” [1]

Generally, life insurance premiums payable by a business are not deductible. [2]  Which means the income received (whether in a single sum or otherwise) by the business, under the life insurance contract by reason of the death of the insured, is not included in gross income.  [3] 

If a key employee policy is transferred for valuable consideration, just as with other life insurance policies, the income tax benefit normally afforded to life contract proceeds payable at death may be extinguished. [4]

As was discussed a few weeks back in our blogticle: AdvisorFYI- Treatment Life Insurance Contracts—Part II: Secondary Market Participants, “[i[n the case of a transfer for valuable consideration…the amount excluded from gross income shall not exceed an amount equal to the sum of the actual value of the consideration paid and the premiums and other amounts subsequently paid by the transferee.” [5]   In other words, the transferee must include the death benefits as gross income over the amount of consideration and any additional premiums paid. 

Read the entire blogticle at AdvisorFYI.

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Proposals for Simplification of Life Insurance Policy Donation

Posted by William Byrnes on October 25, 2010


Valuing a donated life insurance policy can be tricky when taking a charitable contribution deduction. Detailed IRS guidance on insurance policy valuation has been confined to other scenarios, such as where a policy is sold or included in an estate.  Also complicating policy donation is the requirement that a qualified appraisal of the donated policy be included with the taxpayer’s return.

For in-depth analysis of the topic of charitable giving, see Advisor’s Main Library Section 1 F—Estate Planning Through Charitable Contributions

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We invite your questions and comments by posting them at AdvisorFYI, or by calling the Panel of Experts.

 

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