Single Premium Whole Life Insurance Policy

<div class="Section1">A single premium life insurance policy generally is treated in the same manner as a multiple-premium life insurance policy for income tax purposes. For all life insurance policies that meet the definition of life insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="65">65</a>), cash surrender value increases generally are not taxed until received ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8">8</a>) and death proceeds generally are received income tax-free ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="63">63</a>).<div></div><div class="Section1">The tax treatment of policy loans depends on whether the policy is treated as a modified endowment contract (MEC). Most single premium policies are considered MECs; policies entered into on or after June 21, 1988 that do not meet the seven pay test of IRC Section 7702A(b) are classified as MECs. Loans from MECs are taxable as income at the time received to the extent that the cash value of the contract immediately before the payment exceeds the investment in the contract.<a href="#_ftn1" name="_ftnref1">¹</a> These distributions also may be subject to a penalty tax of 10 percent ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="13">13</a>).<a href="#_ftn2" name="_ftnref2">²</a></div><div class="Section1"><br /> <br /> Life insurance policies, including single premium policies, issued prior to June 21, 1988, generally are grandfathered and are not subject to the seven pay test. Loans from these policies will not be treated as taxable income. Loans from policies that are not grandfathered but that meet the requirements of the seven pay test also are not treated as taxable income. Any outstanding loan becomes taxable income at the time of policy surrender or lapse, however, to the extent that the loan exceeds the owner&rsquo;s basis in the contract ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="10">10</a>). If policy death proceeds are tax-free, the amount of the loan is not taxed but is treated as part of the tax-free death proceeds ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="65">65</a>). Note that a grandfathered policy may lose its grandfathered status if it undergoes a material change in its terms or benefits or is exchanged for another life insurance policy under IRC Section 1035 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="13">13</a>).<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;72(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;72(v).<br /> <br /> </div></div><br />