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

[AmyC]

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 

[DH21]

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.

[DaveF1006]

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 

[khende]

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?

[MarilynG]

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
 

[james8151947]

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.