Critical Illness Test

[somarco]

If you have a critical illness policy that is attached in any way to a life insurance policy, does the face amount reduce by an amount corresponding to the CI payout?

If so, you may have a taxable event. The benefit is not payable under a health insurance policy (which is usually received tax free) but rather is an advance on your death benefit.

Living Benefit | Terminally Ill | Life Insurance | Insure.com

 

[Guest]

If you have a critical illness policy that is attached in any way to a life insurance policy, does the face amount reduce by an amount corresponding to the CI payout?

If so, you may have a taxable event. The benefit is not payable under a health insurance policy (which is usually received tax free) but rather is an advance on your death benefit.

Living Benefit | Terminally Ill | Life Insurance | Insure.com

Thanks for this! I asked some questions about this before I read this far in the forum...

 

[billberry12]

Wait a minute...since when are life insurance proceeds taxable?

 

[Guest]

Wait a minute...since when are life insurance proceeds taxable?

I can see how the CI (non-terminal) payout could drain the CSV on that type of policy (i.e. AGLA) and trigger a tax event due to gain received over basis.

 

[0b1kanobee]

If you have a critical illness policy that is attached in any way to a life insurance policy, does the face amount reduce by an amount corresponding to the CI payout?

If so, you may have a taxable event. The benefit is not payable under a health insurance policy (which is usually received tax free) but rather is an advance on your death benefit.

Living Benefit | Terminally Ill | Life Insurance | Insure.com

I've read that article and also posted what I found on the IRS website.
HERE IS WHAT I READ IN THE ARTICLE YOU LINKED:

"The income from a living benefit is not subject to federal income tax, provided it meets certain criteria. In most states, the living benefit is not subject to state income tax."

HERE IS WHAT THE IRS WEBSITE SAYS:

Publication 554 (2011), Tax Guide for Seniors

Accelerated Death Benefits

Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. However, see Exception , later. For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit.

In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Generally, a viatical settlement provider is one who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill.

To report taxable accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return.

Terminally or chronically ill defined. A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months from the date of the certification. A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions.
The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity.

The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment.

Exception. The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured:
Is a director, officer, or employee of the other person, or

Has a financial interest in the business of the other person.

 

[billberry12]

Like I said...life insurance proceeds are non-taxable.

 

[rousemark]

Wait a minute...since when are life insurance proceeds taxable?

Death benefits payable to a beneficiary are generally income tax free. However, living benefits are taxable to the extent they exceed the basis of the policy. For example if you cash a policy in and the cash value exceeds what you have paid, the excess is taxable. The same with the CI benefits if they reduce the face amount.

"Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit." That limit is the basis of the policy.

 

[somarco]

You might want to read the link above from Insure.

You should also read the link provided by Obi1 before declaring life insurance proceeds are not taxable.

 

[rousemark]

You might want to read the link above from Insure.

You should also read the link provided by Obi1 before declaring life insurance proceeds are not taxable.

??? If your post was meant for me.. I am saying it is taxable....

 

[somarco]

If your post was meant for me.. I am saying it is taxable...

.

Not directed at you, Louis.

Like I said...life insurance proceeds are non-taxable.

Billberry . . .