Tax Facts
3674 / Are the death proceeds of an individual retirement endowment contract taxable?
An endowment contract is a policy under which a person is paid a specified amount of money on a certain date unless he or she dies before that date, in which case, the money is paid to a designated beneficiary. Endowment proceeds paid in a lump sum at maturity are taxable only if the proceeds are more than the cost of the policy. To determine the cost, subtract any amount previously received under the contract, and exclude from income the total premiums (or other consideration) paid for the contract. Include the part of the lump sum payment that is more than the cost in income.1
If no nondeductible contributions ( Q 3656) have been made by the taxpayer to any traditional individual retirement plan, the portion of the death benefit of an endowment contract equal to the cash value immediately before death is included in gross income as a federal income taxable distribution. The balance is federal income tax-free as proceeds of life insurance under IRC Section 101(a). If the death benefit is paid in installments, the amount representing life insurance proceeds is prorated and recovered tax-free under IRC Section 101(d).2
If nondeductible contributions to any such individual retirement plan have been made, it would seem that a portion of the cash value of the contract should be treated as a recovery of basis and, as such, nontaxable ( Q 3671).
If no nondeductible contributions ( Q 3656) have been made by the taxpayer to any traditional individual retirement plan, the portion of the death benefit of an endowment contract equal to the cash value immediately before death is included in gross income as a federal income taxable distribution. The balance is federal income tax-free as proceeds of life insurance under IRC Section 101(a). If the death benefit is paid in installments, the amount representing life insurance proceeds is prorated and recovered tax-free under IRC Section 101(d).2
If nondeductible contributions to any such individual retirement plan have been made, it would seem that a portion of the cash value of the contract should be treated as a recovery of basis and, as such, nontaxable ( Q 3671).
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