Foreign Life Insurance Proceeds and Where to Report

[pooja555]

I had a policy overseas for about 12 years and the policy automatically expired and I got some proceeds from that. I am assuming that the proceeds are taxable. However, is this interest, dividend, etc. Where do I report this sort of income on my tax return? I cannot find a answer. 

[pk]

@pooja555 , first Namaste;   you need to tell me   (a) are you US citizen/Resident ( Green Card ) / Resident for Tax purposes; (b) when did you come here ;  (c) was this a whole life insurance and if so how much did did you pay in over the years  + what was the amount paid top you when cancelled /lapsed; (d) was the policy a private  policy you paid  or was it from your employer in India (?);  (e) LIC or which insurer  ( i.e. public sector or private sector ---- any other information  that you can share.  For the  amounts involved  , approximate numbers would be good enough

If it was in the USA,  it is only the gain that may be taxable , depending on circumstances.

[pintuusa1]

@pk - I am interested in knowing about the two scenario - H1b visa holder and GC holder for whole life insurance.
generally most of us gets LIC ( Public Sector) in India ( pretty common), on maturity the proceeds are tax free in India. Do we have to report them to IRS here ?

Few of my friends are on H1B and few on GC, and everyone has the same doubt. I will appreciate your input. 

[samgup]

@pk Please confirm if you gave any guidance on below thread.

Thanks

[pk]

As citizen of India  ( Green Card or H-1B )  US-India treaty would apply  when you receive the benefits.  I will have to go back and re-read that portion and come back.  Generally, the benefits may be taxable only when distributed ( i.e. the   growth )  if and only if  you are a resident of the USA at the time.  The contribution to such  life insurance policy  ( whole life ) is not tax deductible  -- same as for US policies.  Will come back on the treaty  

[Opus 17]

Generally speaking, the proceeds are only taxable if they are more than you paid in premiums.  Besides the treaty issue, an owner of a foreign life insurance policy may have trouble proving how much they paid in, if the insurance company does not keep track like they do in the US.  If you were audited, you would need some way to establish what you paid in premiums that was more than a guess.  

Then, that taxable income might be further modified by a tax treaty. 

[samgup]

Thanks @pk and @Opus 17 for your responses. 

Few questions

1: Is this the correct way to calculate net profit for tax calculation?

Net profit ($) = "Total net proceeds in $ when received" minus "Total premium ($ value of each premium per that year's currency conversion rate when the premium was paid)"

2: Will the net profit be shown as other income or Interest? 

[pk]

@samgup  generally agreeing with @Opus 17 ,  and having gone through the US-India tax treaty, there are two scenarios to consider ;

(a) a whole life insurance policy is surrendered by the owner ( by a Resident of the USA or a Resident for tax purposes) ---- in such a case the payout /distribution consisting of  contributions  by the owner and any growth  to date less any fees that the administrator charges.  US insurance company  will generally issue a 1099-R showing the gross distribution and the taxable  distribution ( being the growth less fees charged ). This is what you will be taxed on.  Since a foreign insurance entity may not issue such a document, you will have to create one from the available information provided by the administrator of the policy.  Note that unless you have to records to prove the  exchange rates at each contribution, one may use the exchange rate at time of distribution as a stand-in  ( even though technically correct format would be to use some kind of averaging       ( like annual one  published by the US treasury)

(b) the insured passes  and the  proceeds of the policy are released to the estate of the decedent for the beneficiary of record or distribution to inheritors.  In such a case there generally is no taxation.

Does this answer your query ?  @Opus 17  is much more an expert on annuities/retirement distribution and insurances than I am  -- I just deal with international taxation -- perhaps he will comment on this

[Opus 17]

---

@samgup wrote:

Thanks @pk and @Opus 17 for your responses. 

Few questions

1: Is this the correct way to calculate net profit for tax calculation?

Net profit ($) = "Total net proceeds in $ when received" minus "Total premium ($ value of each premium per that year's currency conversion rate when the premium was paid)"

2: Will the net profit be shown as other income or Interest? 

---

Yes, you would value the premiums at the exchange rate on the day you paid them and the cash surrender value on the day you received it.  You would report this as dividend or interest income.  There should be a place to check "I did not receive a 1099 form from this payer" after entering the payer's name.

If you also paid foreign tax (in India) on this money, you can take a deduction or credit.  It's on the Deductions and Credits page under Foreign Taxes paid, and this would be passive income. 

[samgup]

Thanks @Opus 17 and @pk for giving valuable clarifications on this topic.

[Fabien1]

Thanks !

I have the same issue with a french life insurance, and I will do as you tell.

[ACSO]

Thanks for these questions and answers as they are very informative. I have a sightly different situation pertaining to this topic and they are:

(1) The proceeds of insurance policy is due to maturity instead of surrender

(2) The premiums paid exceeds the proceeds

I understand from this discussion and also from IRS Tax Interactive Assistant interview that the proceeds are not taxable in this case since the premium paid is more than the proceeds. My questions are then,

1. Are proceeds from maturity treated the same as surrender?

2. Do I still need to report this negative 'income'? If so, where and how to report this negative 'income'?

Thanks!

[pk]

@ACSO  is this a foreign and unregulated insurance entity  ( regarded as a PFIC  and subject to Mark-to-market ) or a domestic regulated insurance entity ?

[ACSO]

Hi @pk, this is a foreign insurance company (Prudential) that does not issue 1099R since it is not US based.

Thanks!

[pk]

@ACSO , is the loss due to currency fluctuations ( probable not reportable ) or due to actual loss  by entity ( may be casualty loss applicable ) ?  I have to search on this  -- hoping to find something that will allow some of the loss loss being recognized .   Which country are you talking about ?   Are you a US person ( citizen/ GreenCard / Resident for Tax Purposes )?

In the meantime I will go search / readup.

pk