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

[Tom-T]

For entering 1099-R info, TurboTax asks: "Was This Distribution From a Qualified Plan?".   It also adds that "Most plans are qualified plans."  But it also says that "Non-Qualified Plans include: Life insurance policies (if distribution is full payment)."

I don't understand why TurboTax includes that added condition.  What difference does it make "if distribution is full payment"?  What if the distribution is NOT "full payment"?

In my case, the payer (Prudential Insurance) includes the following statement on my 1099-R:  "This form 1099-R reports taxable gain on distributions from your Prudential contact including dividends credited.  When total dividends credited over contract life exceed total premium paid, excess is considered gain and tax reportable."

These dividends are reported to me annually.  So they are NOT a "full payment distribution".  They are ongoing annual payments.  So, since these annual distributions are not a full payment, is this life insurance policy still considered a Non-Qualified Plan?  Is it OK to ignore the added condition that TurboTax makes regarding the distribution being a "full payment"?

[wendikimbrell]

non qualified plans

[Tom-T]

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.

[Brinik]

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?

[RobertG]

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

[Brinik]

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.

[JJ1847]

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!

[DaveF1006]

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?

[JJ1847]

I would be happy to provide the additional information.

Premiums for the policy are $158 annually paid from policy dividends.

I receive 2 documents from the insurance company for tax purposes.

1. 1099 INT in the amount of $517.63 in box 1

2. 1099 R with $292.10 in box 1, $134.10 in box 2a, $158.00 in box 5 and the number 7 in box 7 on the form.

Let me know if you need any additional information.  Thank You!

[Brinik]

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.

[Brinik]

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

[VictoriaD75]

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.

[JJ1847]

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

Appreciate a more direct explanation.  Thank You!

[AmyC]

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

[mokragleski]

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