What are the income tax consequences when the owner of a life insurance or endowment contract takes the lifetime maturity proceeds or cash surrender value
in a one sum cash payment?
With a 34% marginal tax rate, he would have to pay $680,000 of taxes--the tax bill on surrender of the policy would consume the entire cash surrender value
he received, and he would have to pay an additional $180,000 of tax out of pocket.
If the cash surrender value
is invested conservatively, some if not most of the money will be in very short-term bonds.
The exemption protects the cash surrender value
of a life insurance policy.
The amount of the loan should be shown to reduce the cash surrender value
, with disclosure of the amount so offset.
2 million--nearly 11 times the cash surrender value
For now, "Fair Market Value shall be cash surrender value
(without reduction for surrender charges) provided that the cash value is at least as large as the aggregate of (1) the premiums paid from the date of issue through the date of distribution, plus (2) any amounts credited (or otherwise made available) to the policyholder with respect to those premiums, including interest, dividends and similar income items, minus (3) reasonable mortality charges and other charges (other than mortality charges), but only if those charges are actually charged on or before the date of distribution.
Taking into account both initial expenses and taxes, Albizzati and Geman (1994) compare, at any given future date, the (deterministic) final value of the contract with the final value of a new one, having the same maturity and acquired by reinvesting the (guaranteed) cash surrender value
at the prevailing market conditions.
That is, the premium funds both the insurance and an increase in the policy's cash surrender value
The paid-up additions carry a much lower commission and, therefore, leave the policy's cash surrender value
much higher in the early years.
If the policy is surrendered for its cash value, however, any excess of cash surrender value
over the cumulative premiums paid wold be included in taxable income.