Return Of Premium

[Arthur Rudnick]

I've got a question and I'm not sure if there is presently an answer.
There's an answer only if the IRS has made a ruling on this and to date, I'm not sure if they have.

This has to do with a Full Return of Premium option.

Let's say that a someone pays $5,000/yr. for 20 years on a TQ LTC policy.

2 scenarios:

1) NY State offers a LTC policyholder a 20% tax-credit every year on the total amount of the premium. So, at the end of the 20-year period, in total the policyholder has paid $100,000 in premium and has also received a total of $20,000 in refunds from the state.

He cancels his policy (or dies) and either he or his estate receives $100,000 back.
There must be some tax ramifications, what are they?

2) A person purchases a LTC policy and puts the premiums through his business as a business expense (Executive carve-out for instance on a C-corp).
In total, the business has deducted $100,000 over 20 years and then, when the policyholder either dies or cancels his policy, the $100,000 is then returned to his business.
There must be tax ramifications, what are they?

Any tax attorneys out there?

 

[VolAgent]

Re: Rop

I'm no attorney, but I want to give an uninformed opinion anyway!

The general rule is, if you deduct it now, you pay taxes on it later.

Have you asked advanced sales at one of your LTCi carriers? Surely they have already thought of this situation.

 

[yankee466]

Re: Rop

How do you get your money back if you cancel? Who offers that these days? Assurity used to give you 80% back if you elected the option.

 

[Arthur Rudnick]

Re: Rop

"How do you get your money back if you cancel?"

I don't know. Never sold a full ROP, I just thought death or cancelation were the same?
Guess not, huh?

 

[yankee466]

Re: Rop

well.....NADM might ding you on that one....but I thought there might be some plans still offering some cancellation options like Assurity used to, but it has nothing to do with RoP. As far as I know, ya gotta die to get it.

 

[billberry12]

I am not aqn attorney or CPA, but hrere is a thought.

ROP is simply a small life insurace policy which the premium is added to the LTCI premium. When the plicy holder dies, any ROP applicable would be sent to the named benficiasry or estate, and treated the same as life insurance proceeds. Just a thought.

 

[Arthur Rudnick]

"ROP is simply a small life insurace policy which the premium is added to the LTCI premium. When the plicy holder dies, any ROP applicable would be sent to the named benficiasry or estate, and treated the same as life insurance proceeds. Just a thought"

Bill,
Nice thought, but I'm not sure it holds any water.

The issue is not about product. The issue is about a person or a business that has taken a tax deduction or in the case of a NYS resident, an actual tax-credit.

In the NYS case:
* $100,000 in premiums paid
* Policyholder has received back $20,000 in tax-credits from the state, leaving him with a net, out-of-pocket of $80,000.
* Policyholder's estate or beneficiary is receiving a full $100,000 when the actual net cost was only $80,000.

My gut tells me that there's some tax ramification involved. Common sense says you can't take a $20,000 credit when in actuality, a net $80,000 premium would only generate a tax-credit of $16,000.

Interestingly, the couple of carriers that I contacted will not go on record with an answer. They are very noncommittal and say they are not CPAs or Tax Attorneys and cannot answer the question.

More interesting is this:
One carrier told me that no 1099 is issued on a ROP. The law does not require it.

My guess is that the IRS (and this is absolutely an IRS issue, not a carrier issue) has never had to make a ruling.

Just like the IRS, in 15 years has never made a ruling on whether benefits from non-TQ policies are consdidered taxable income.

 

[VolAgent]

Sounds like no one ever gets their premium returned to make a ruling on...

 

[Arthur Rudnick]

"Sounds like no one ever gets their premium returned to make a ruling on"

or...................
they have, but the policyholder was never audited by the IRS. I'm not an accountant, but if someone was audited and the IRS came up with an issue where it doesn't appear in the present tax code, a rule would have to be made to cover that particular situation.

So, technically, if the IRS audited someone and found that the person did not report benefits on a non-TQ LTC policy, either nothing happens (because there is presently nothing in the existing taxes code to address it) or, the IRS can issue a new code to cover it.

I guess to date, no one has ever sued the IRS over their denial for a taxpayer reporting benefits paid on non-TQ policies as taxable income.

 

[Mr_Ed]

"Sounds like no one ever gets their premium returned to make a ruling on"

or...................
they have, but the policyholder was never audited by the IRS. I'm not an accountant, but if someone was audited and the IRS came up with an issue where it doesn't appear in the present tax code, a rule would have to be made to cover that particular situation.

So, technically, if the IRS audited someone and found that the person did not report benefits on a non-TQ LTC policy, either nothing happens (because there is presently nothing in the existing taxes code to address it) or, the IRS can issue a new code to cover it.

I guess to date, no one has ever sued the IRS over their denial for a taxpayer reporting benefits paid on non-TQ policies as taxable income.

no one's ever paid tax on NTQ benefits because the tax code does not say the benefits are taxable. the tax code is silent on it.

no one has paid income tax on an ROP rider because the ROP is NOT reported to the IRS. It's NOT income. It's simply a refund of premiums paid.

Lastly, this statement is ludicrous:

My gut tells me that there's some tax ramification involved. "Common sense says you can't take a $20,000 credit when in actuality, a net $80,000 premium would only generate a tax-credit of $16,000."

That happens all the time. My heirs will get my life insurance death benefit for free. My death benefit is A LOT lower than the sum total of my premiums paid.

nadm