borrowing against life insurance policy


S

sgwhitman

My aunt borrowed against her life insurance, she loaned the
money to her granddaughter to buy a home. They are making
monthly payments back to the insuance company. However my
aunt received a bad suprise when she went to file her taxes.
Insurance company issued her a 1099R on the loan proceeds
and she ended up oweing $12000.00 in taxes. Should this be
a taxable event??? She talked to her agent, and he doesn't
have a "clue" He was "suprised" it was taxable. He said he
hasn't have anyone borrow that large of a sum and "maybe"
that was the reason.

Is this correct?? I though that as long as you were paying
the loan back plus interest that there was no tax due, or am
I just think about borrowing against your 401K. She has try
to call the insurance company direct but hasn't been able to
as of yet.

Thanks, Sharon
 
Last edited by a moderator:
D

Dennis Marks

My aunt borrowed against her life insurance, she loaned the
money to her granddaughter to buy a home. They are making
monthly payments back to the insuance company. However my
aunt received a bad suprise when she went to file her taxes.
Insurance company issued her a 1099R on the loan proceeds
and she ended up oweing $12000.00 in taxes. Should this be
a taxable event??? She talked to her agent, and he doesn't
have a "clue" He was "suprised" it was taxable. He said he
hasn't have anyone borrow that large of a sum and "maybe"
that was the reason.

Is this correct?? I though that as long as you were paying
the loan back plus interest that there was no tax due, or am
I just think about borrowing against your 401K. She has try
to call the insurance company direct but hasn't been able to
as of yet.
I would think it would be the same as a cash surrender where
the tax due is based on the proceeds less the premiums paid.
Basically paying tax on the increased value. The 1099R
should show the total amount and the taxable amount. Look
closer at the form.
 
Last edited by a moderator:
H

Herb Smith

My aunt borrowed against her life insurance, she loaned the
money to her granddaughter to buy a home. They are making
monthly payments back to the insuance company. However my
aunt received a bad suprise when she went to file her taxes.
Insurance company issued her a 1099R on the loan proceeds
and she ended up oweing $12000.00 in taxes. Should this be
a taxable event??? She talked to her agent, and he doesn't
have a "clue" He was "suprised" it was taxable. He said he
hasn't have anyone borrow that large of a sum and "maybe"
that was the reason.

Is this correct?? I though that as long as you were paying
the loan back plus interest that there was no tax due, or am
I just think about borrowing against your 401K. She has try
to call the insurance company direct but hasn't been able to
as of yet.
It was a LOAN. Loans are not taxable income, unless you
neglect to pay them back. That does not appear to be the
situation here.

My guess is that she did not understand what she was asking
for, and actually made a withdrawal from an insurance-based
annuity instead of getting a loan against the insurance
"cash value". That would be a taxable distribution, and a
1099-R would be appropriate.

Sounds like a failure to communicate.
 
Last edited by a moderator:

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