Tax exposure of surrendering a VUL

Jul 20, 2008

  1. Guest
    Online

    Guest Guest

    What are the tax implications of surrendering a VUL. Is it ordinary income... or is there a basis to be considered?

    Al
     
    Guest, Jul 20, 2008
    #1
  2. djs
    Offline

    djs Super Moderator Moderator

    Posts:
    6,679
    Likes Received:
    74
    State:
    California
    Why would someone surrender a VUL? Once you have a solid answer for that, the gains are taxed at capital gains rates.

    You'll have to get a statement from the life company to really sort this out, or you can go through statements, figure out what they paid minus the various charges that apply to the life side, calculate what was invested, and what the current value is. Also, you need to know what the surrender penalty is, if any.

    Again, make sure you have a solid reason for surrendering a VUL. It's hard to rollover a VUL into something else and have it pass any type of smell test. Not impossible, but there are a lot of things to consider.

    Dan
     
    djs, Jul 20, 2008
    #2
  3. Guest
    Online

    Guest Guest

     
    Guest, Jul 21, 2008
    #3
  4. bluemarlin08
    Offline

    bluemarlin08 Guru

    Posts:
    1,926
    Likes Received:
    6
    the gains are taxed at capital gains rates.


    I assume you mean short term capital gains?
     
  5. djs
    Offline

    djs Super Moderator Moderator

    Posts:
    6,679
    Likes Received:
    74
    State:
    California
    Why short term? When was it bought?
    If it will implode in 3 years, I assume there are no gains to worry about. Why not just decrease the death benefit to something sustainable?

    Are you planning on a 1035 exchange? If so, you are back to that question of why surrender a policy that has been in force for a while to get a policy that probably has higher rates and starts the surrender charge time all over again?

    By the way, I'm not trying to be confrontational on this question, but its the right question to always ask when surrendering a permanent life policy and getting a new one. I'm not sure this is what you are doing, but you need to have a solid answer for this, it will keep everyone out of trouble later on.

    Dan
     
    djs, Jul 21, 2008
    #5
  6. DAX
    Offline

    DAX New Member

    Posts:
    7
    Likes Received:
    0
    Check Tax Facts, if there is a gain, it is taxed as ordinary income.
     
    DAX, Jul 23, 2008
    #6
  7. GreenSky
    Offline

    GreenSky Guru

    Posts:
    15,339
    Likes Received:
    455
    State:
    Nevada
    If I worked for an insurance company, I might ask the manager or home office.

    Rick
     
    GreenSky, Jul 23, 2008
    #7
  8. Marpol
    Offline

    Marpol Super Genius

    Posts:
    149
    Likes Received:
    0
    State:
    California
    DAX is right. Life insurance is an ordinary income property for tax purposes. Anytime a policy is surrendered the gains surender value) above basis are considered ordinary income.
    See IRC Section 72. Also in TaxFacts I think it is under Q250

    The only time it would be considered a capital gain is if the policy was sold as a Life Settlement, than the money received from the sale would be taxed in the following way:

    up to basis - no tax
    from basis to surender value - ordinary income
    above surender value - capital gain
     
    Marpol, Aug 18, 2008
    #8
  9. LGilmore
    Offline

    LGilmore Guru

    Posts:
    4,110
    Likes Received:
    172
    State:
    Washington
    Al is this the one you were asking about last month?

    where they wanted to sue, but really had no case?

    Are you sure it will explode in three years? Have you checked with the company?

    Can you provide more detail?
     
    LGilmore, Aug 18, 2008
    #9
Loading...