The Taxation of Life Insurance and Long Term Care (9:42)
Proceeds are generally not taxable as income for beneficiaries
Broadcast Retirement Network’s Jeffrey Snyder discusses the taxes associated with receiving benefits from life insurance and long-term care insurance policies with The Warner Companies’ Phillip Snyder CLU.
Jeffrey Snyder, Broadcast Retirement Network
This morning on BRN, the taxation of life insurance and long term care. We’re going to welcome back to the program, Philip Snyder of the Warner Companies. And full disclosure, he is my father.
Dad, always great to see you. Thanks for joining us on the program this morning.
Phillip Snyder, CLU, The Warner Companies
Hey, Jeff. Good morning. Thanks for having me.
I appreciate it.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. It’s always good to see you. You look nice and rested from your vacation.
So it’s always. Yeah. Ready to talk about insurance and taxation, I presume.
Phillip Snyder, CLU, The Warner Companies
Should have brought some warm weather back with us, but we didn’t do that.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. I’m looking out the window of the studio here in Charlotte. It’s snowing a little bit, but probably not as bad as it is up east.
All right. Northeast. All right, dad, I want to ask you, let’s start with some basics here.
Let’s talk about life insurance, long term care insurance, and taxation. What do we need to know about those particular instruments, services, products, and how it impacts your taxation?
Phillip Snyder, CLU, The Warner Companies
Okay. Well, generally, let’s start with life insurance. The general rules of life insurance are premiums paid by individuals are not tax deductible.
They’re after tax expenses. Benefits received by beneficiaries, with very small exception, very unusual exception, are tax free to the beneficiary. Cash value that accrues, if you’re buying some cash value type of policy, cash value accrues on a tax deferred basis.
And cash value can be accessed through loans and withdrawals, again, depending on the type of policy, on a tax free basis, subject to certain constraints. And as long as you don’t put too much money into those policies that would otherwise change the taxation. So, by and large, nothing’s really changed with respect to life insurance taxation.
It remains as it’s been.
Jeffrey Snyder, Broadcast Retirement Network
Okay. And long term care insurance, because that’s an insurance instrument, but it is different than life insurance.
Phillip Snyder, CLU, The Warner Companies
Oh, for sure. Well, there are several ways to buy long term care insurance. If you’re just buying a long term care policy, the premium is not deductible at the federal level.
There may be state incentives. There are in Maryland, for example, perhaps in North Carolina, but they’d be state specific that would give you some incentive to help offset the cost of long term care insurance. But by and large, those premiums are not deductible.
Benefits received under a long term care policy are income tax free. Again, with certain limitations imposed, but by and large, all benefits received under long term care policies are income tax free. So, that’s a real quick thumbnail.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, that’s a thumbnail, but that’s also good news. So, Dad, I don’t know if you know this or not, but it’s tax season. I think we all know that.
Just joking. Just joking. So, if I received, I’m just saying hypothetically, if I received life insurance, I was a beneficiary and received money, or I was, yeah, and we want that to be the case.
I’m not going to would, but let’s just say hypothetically, I received a benefit as a beneficiary, or I was taking money out of a long term care policy. How would I report that to my CPA? Let’s talk about the reportability of that.
Does some form, and I’m used to the retirement world. So, when a distribution happens at 1099, whether it’s a rollover or a taxable type of distribution, it gets reported, and I give that to my accountant. So, does my accountant, does the IRS receive anything for the payout of that life insurance or the premium from the long term care policy?
Phillip Snyder, CLU, The Warner Companies
Sorry to interrupt you.
Jeffrey Snyder, Broadcast Retirement Network
That’s okay.
Phillip Snyder, CLU, The Warner Companies
Yeah, death benefits are reported on a form 712, and you would just give that to your attorney. You would give that to your accountant, whoever’s managing the estate, but that doesn’t change the taxation in any way. So, those benefits are going to be income tax free.
With respect to long term care benefits that are received, a 1099 is sent out by the insurance company. Again, it’s just informational. So, it’s not taxable as such.
So, really nothing’s changed there at all.
Jeffrey Snyder, Broadcast Retirement Network
So, would my accountant know? So, what a handover, usually when you’re working with an accountant, whether it’s H&R Block or a mom and pop accountant, you give them all the information. So, I would give them my 1099s.
I’d give all of them all the W-2s, etc. They would know, because I guess this is generally accepted accounting principles gap, right? They would know not to include this in my ordinary income.
Phillip Snyder, CLU, The Warner Companies
Well, yeah. The 1099, or the life insurance, they would clearly know. It’s life insurance, death benefits, they’re income tax free.
Again, with some minor, minor exceptions, but we don’t need to go astray with that. On the long term care side, it’s an informational 1099. So, they would know that those benefits are tax free.
Again, there are some limitations there as to how much could be tax free, but by and large, they are essentially tax free benefits. And your accountant should know, certainly.
Jeffrey Snyder, Broadcast Retirement Network
And you can probably remind them as well, when you fill out. They have like a planner, right? They ask you, like, you know, did you do an IRA?
I mean, there’s like 100 questions you have to answer, typically.
Phillip Snyder, CLU, The Warner Companies
Yeah, yeah. But the 1099 you received was informational. It’s just notifying the IRS that you did receive long term care benefits.
Jeffrey Snyder, Broadcast Retirement Network
All right, Dad. One other thing I wanted to ask you about is the Tax Cut and Jobs Act of 2017. So, that is, I think the Congress is now starting to ramp up.
I think they’ve got a process in place to start to look at the budget, but also start to look at this, extending this bill. Is there anything that we need to be thinking about as holders or recipients of life insurance benefits that would cause us concern in this potential conversation about extension? So, could this tax free waiver, I’m going to call it, I don’t know what you technically call it, but the deferral of taxes, you’re not paying any taxes.
Could that at any point be subject to taxation under this potential extension of the TCJA?
Phillip Snyder, CLU, The Warner Companies
Not to my knowledge. Nothing that I’m aware of would change the general taxation of either of those products, as I just discussed it. There’s a move afoot, certainly, to change the taxation of private placement life insurance, which is a whole different animal.
It’s relegated to the ultra-wealthy who put huge sums of money into life insurance policies to shelter the earnings and facilitate tax-free withdrawals. But nothing that I’m aware of, anyway, that would impact the taxation of life insurance benefits and long-term care benefits.
Jeffrey Snyder, Broadcast Retirement Network
I mean, it would be earth-shattering to change what has been in place for probably, presumably, decades. Now I’m thinking about the policy aspect of it. I mean, I could see, look, the government wants to get its hands on everything, right?
I mean, they want revenue. They need revenue for the services they provide, both at the state, local, and federal level. But any change to the taxation, I think, would just be, you know, it would cause people to say, well, why would I want to buy a life insurance policy, then, if I’m going to get taxed on it?
I might as well just save the money in a savings account or a mutual fund.
Phillip Snyder, CLU, The Warner Companies
Okay. So, with respect to estate taxes and gift taxes, particularly as they apply to life insurance, given the current administration in Washington, I don’t see that changing. Those benefits are indexed, or there’s a co-applied to them, so they should increase over the years, at least, I would say, for the foreseeable four years, anyway.
Yeah. So, I don’t see any changes there, as well.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. Well, we’re going to have to watch it. I always get concerned when we start talking about the, in my personal opinion, I always get concerned when we start talking about extending these tax cuts, and then, you know, the cutters are always on the hunt for some of these tax-deferred status that I think would be very disruptive to not only life insurance, but to other industries.
So, I guess we’ll have to watch it. Dad, we’re going to have to leave it there. Jeff Snyder, thanks so much for your time, and we look forward to having you back on the program again very soon.
Phillip Snyder, CLU, The Warner Companies
Okay, Jeff. My pleasure, Bashir. So, have a good day.
Jeffrey Snyder, Broadcast Retirement Network
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Until tomorrow, I’m Jeff Snyder. Stay safe, keep on saving, and don’t forget, roll with the changes.