Are life insurance policies "Qualified" or "Non-Qualified" plans?

non qualified plans

What about the statement from TurboTax that Non-Qualified plans include Life insurance policies "if distribution is full payment."  My policy here is NOT full payment.

I have a 1099-R  with same question of Qualified or Non-Qualified except it was a Loan from a Life Insurance Policy which then lapsed  but was reinstated and they gave a 1099-R because it lapsed and it is not a FULL payment. Would it be Qualified? or Non Qualified?

It is still a non-qualified plan. 

A qualified retirement plan is an employer's plan to benefit employees that meets specific Internal Revenue Code requirements. These plans may qualify for special tax benefits, such as tax deferral for employer contributions. Your contributions may also qualify for tax deferral.

Examples of qualified plans are 401(k) plans and IRA plans. 

Non-qualified plans are those that are not eligible for tax-deferral benefits. Public sector plans are nonqualified plans. If it is not an employer plan it is a nonqualified plan

Thank you very much,   Do you know if life insurance distributions are Taxable in the state of Pennsylvania?  And it was not a distribution because someone passed away, it was because the policy lapsed and there was a loan on it, even though it was reinstated.

Appreciate the response, but could you be a little more clear on the following?

I use annual dividends on the whole life insurance policy to pay my annual premiums.

Since my dividends for the tax year exceed my annual premiums, I get these 1099-R statements.

So if the excess dividends are reinvested, why would I be getting the 1099-R since no money is actually distributed to me?

Is it better to pay the annual premiums out of pocket?  Would that stop the 1099-R statements which appear to add to my income?

Thank You!

If you choose to reinvest your dividends, you still have to pay taxes as though you actually received the cash. These are reported on the 1099 DIV and is taxable income. The question is does your 1099 DIV reflect the amount of the entire distribution including the premium amounts?  If so, issuing a 1099R for the excess dividend amount is resulting in double-taxation. Can you clarify this for me?

it is a 1099-R  with code 7 in box 7 for Normal Distribution,   We had a loan against the Life insurance policy and it lapsed so they sent us the 1099-R and did not re-invest the money as the loan was from about 8 years ago.   I'm trying to make sure that the code in box 7 is the correct code.

and I don't know if it is taxable on Pa state return

The distribution code 7 is for a normal distribution defined as (a) for a normal distribution from a plan, including a traditional IRA, section 401(k), or section 403(b) plan, if the employee/taxpayer is at least age 59 & 1/2, (b) for a Roth IRA conversion if the participant is at least age 59 & 1/2, and (c) to report a distribution from a life insurance, annuity, or endowment contract and for reporting income from a failed life insurance contract. Distribution code 7 is correct.

Yes. The income will be taxable on your state return. Enter it on your Federal return, and it will automatically report on the state.

Hi Folks,  You asked me for additional information on my question, but haven't provided a response.

Appreciate a more direct explanation.  Thank You!

Thanks for replying. Now we can understand.

Your box 1 is your total amount of distribution for $292. Of that, box 2a, the only taxable amount is $134. The difference is $158, your premiums for the year. That number matches your box 5, insurance premiums.

You are code 7 for a regular distribution. 

You are not paying taxes on the $158 premium, only on the extra $134 you received. Which you didn't take into your hand, you reinvested. Think of it as if they gave the $134 and then you went to your broker and asked them to put it back into the fund. You got the money and get to benefit from it.

Everything is right.

@JJ1847

As this response is from 2 years ago, I am not sure if  you can help me on this.

I have similar scenario where I have life insurance policy that is non-qualified.

I withdrew money from it and invested it in my IRA.

The 1099-R box 1 shows how much I withdrew, Box 2a shows the same amount. Both boxes in 2d are blank.

As the plan is non-qualified, I don't get why Turbo Tax is taxing it?

I am concerned that my 1099-R is wrong

and if I override it, I could get audited.

Would this transaction be taxable?

Thanks

Mike from Michigan

It can be taxable. You are holding a 1099-R showing a taxable amount. The fact that it could be used for an IRA leads me to believe it would be taxable income. If it was pre-tax dollars that you rolled into an IRA within 60 days, answer the program questions to remove the taxable income. 

I recommend you call the company and find out why they sent you the 1099-R. There records could be wrong or you may have forgotten some detail. You need peace that the form is correct or they need to issue a corrected form. The rules are in 2022 Instructions for Forms 1099-R and 5498 - Internal Revenue Service which states on page 2:

Life insurance, annuity, and endowment contracts. Report payments of matured or redeemed annuity, endowment, and life insurance contracts. However, you do not need to file Form 1099-R to report the surrender of a life insurance contract if it is reasonable to believe that none of the payment is includible in the income of the recipient.

Failure to report a 1099-R with taxable income will get you a letter and a process you don't want. You definitely need to get this handled now.

@mokragleski 

Thank you for the responses in this thread. I have a whole-life policy from which I receive a small amount of dividends paid in cash each year (but I have not cashed out the policy) and I now receive a 1099-R for these payments. It is not, and never was, associated with a company retirement or pension plan, so I categorize it as non-qualified based on some of the responses in this thread. It would be quite helpful if TurboTax included, in their "Learn more" links on this topic, what type of life insurance contract distributions would be considered Qualified and what type of distributions would be Non-Qualified. I'm sure it is income, and I expect to pay taxes on the distribution, I just find the TurboTax help on this topic incomplete. It is difficult to find information on this; my insurance provider's customer support doesn't really know, and it is not easy to find out more from IRS documents.

There isn't a whole lot of information available but I have found a couple of IRS links that may be of interest to you. If you receive 1099R's regarding payment of interest or dividends, these will always be non-qualified only because these do not fit the IRS guidelines for a Common Qualified Plan.

For more information, please see view this IRS FAQ about life Insurance  and also this topic about interest and dividends. 

@DH21 

I also have a question regarding an insurance policy full distribution.  My 1099-R lists the gross distribution, the taxable amount, and the taxes that were withheld, but Turbo Tax is showing that the full amount of the gross distribution as taxable income.  That doesn't see right.  Can you elaborate on this?

Yes, the amount in Box 2a of your 1099-R is the taxable amount.

Step through your 1099-R entry again; there is a question after your entry asking 'has the amount in 2a always been the taxable amount?' that you may have missed.  

Or, you could delete your 1099-R and re-enter it.  Type '1099-R' in the Search window, and click on 'Jump to1099-R' to get to this section.

Here's more info on Form 1099-R. 

@khende
 

I had a 350,000 whole life insurance policy thru MONY for 34 years.  After the first 10 years, I started paying the premium (~$5,500 annual) out of dividend, and when the dividend was not enough to pay the premium, I started taking automatic loans against the policy to pay the balance.  This reduced the cash value each year, but the death benefit remained unchanged.  It seemed great until the loan with accrued interest became too great to to cover the premium.  I was then hit with a ~$12,000 bill to cover loan interest and premium for that year and expected increasing amounts each year.  It was not worth keeping.  I cancelled the policy and got hit with a 1099-R with taxable income of ~$100,000.  What I learned, too late, was that if you cancel a whole life insurance policy, any loan balance upon cancellation date greater than what you pay in toward the premium from inception is taxable as ordinary income.  I had paid into the policy ~$110,000, taken loans of ~$210,000 which left a taxable liability of ~$100,000.  It makes sense.  You cannot get something for nothing.  What I regret is not having cancelled the policy 10 years ago, since I really did not need it.

Waiting for turbo tax to tell me how to enter this on my return when the only option is for retirement, IRA

Its a dividend that exceeded my premiums.  I need this to be answered so I can finish my return. 
May have to go with another tax service if not answered soon.

To clarify, what form was this reported on? Was it a 1099R?

Yes a 1099-R

Talked y to someone  today at TT she recommended that I enter as qualified even though it’s a life insurance policy.  It did make it look like an IRA which it isn’t but I was able to get it finished. Hopefully I have no hiccups with the IRS. 
Turbo Tax needs to give another option showing not a Retirement . 
I didn’t have this problem the prior year. 
Mine was an insurance policy dividends exceeding premiums.