borrowing against life insurance policy

Discussion in 'Tax' started by sgwhitman, Mar 6, 2006.

  1. sgwhitman

    sgwhitman Guest

    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: Jan 23, 2018
    sgwhitman, Mar 6, 2006
    #1
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  2. sgwhitman

    Dennis Marks Guest

    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: Jan 23, 2018
    Dennis Marks, Mar 8, 2006
    #2
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  3. sgwhitman

    Herb Smith Guest

    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: Jan 23, 2018
    Herb Smith, Mar 8, 2006
    #3
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