1099-R/Life Insurance

[Wahoo2000]

I took a full lump-sum distribution from a life insurance policy that had been annuitized last year. I received a 1099-R that shows a partial taxable amount in Box 2. Why is any portion of that distribution taxable (other than a small amount of accrued interest since the last quarterly annuity payment prior to the distribution)?

[JulieS]

It depends on the type of life insurance policy you have, whether it is taxable or not.

In general, term life insurance is tax free. Whole life combines term life with investments, so it's partially taxable.

But your use of the word "annuitized" implies this is an annuity and not a life insurance policy. 

Annuities aren't life insurance policies, but are often sold by life insurance companies. An annuity is an investment vehicle designed to provide lifetime income. When money comes out, all of the earnings in the account are taxable and the original investment isn't taxed. 

You will need to contact the company that gave you the 1099-R if you want a more detailed explanation of how the taxable amount was determined. 

[Wahoo2000]

You are correct. The original life insurance policy was subsequently annuitized. Given that the annuity made payments quarterly I don't see how there can be any taxable portion of the lump sum distribution beyond the accrued interest between the last quarterly payment and the lump sum distribution, but the 1099-R Box 2 is much larger than what that amount would be. 

[JulieS]

It's possible that the basis of the annuity (amount of previously taxed income in the investment) wasn't recorded correctly. I suggest calling the company, or the agent, that you worked with to get clarity. 

[dmertz]

The taxable amount of a lump-sum distribution is the gross amount in box 1 minus your investment in the contract shown in box 5.