Tax question - VA Life Insurnace payout to owner

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RetiredAL
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Tax question - VA Life Insurnace payout to owner

Post by RetiredAL »

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Tax question about Veterans Life Insurance payout to OWNER?

My elderly father was a 30 yr Career Navy person, WW2, Korean, Vietnam, and Cold War. He enlisted as a Seaman and retired as a Lt Cmdr. He turn 96 last November. The VA sent a letter a couple of month's ago stating that since he had already turned 96, on the anniversary date of the policies that the insurance balance would be disbursed to him. There were 2 policies, 1 being from his Enlisted years of service and the other from his Officer years of service. The checks came Saturday.

My question is around taxes. Had anyone in Bogle Land dealt with this kind of VA Insurance payout to the OWNER as a result of having reach a certain age? On the included statements, the bulk of the check's amounts is in the categories of "amount of this insurance policy" and "additional insurance (paid-up)".

Based on what I find on-line, these amounts not taxable even when disburshed to the owner. Is my understanding correct? The sum of these two categories is a pile of money.

There is an additional category of "dividends" for a few hundred dollars. I would expect this to be the interest from when he turned 96 six month's ago.

I intend to query my Dad's Tax Man, but I want to wait a few days. I'm sure he's near burnout with Monday being tax day. In the mean time, this question is burning on me, so I'm looking towards Bogle Land for other people's knowledge.
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RickBoglehead
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Re: Tax question - VA Life Insurnace payout to owner

Post by RickBoglehead »

None of it is taxable per a quick Google search.

https://iris.custhelp.va.gov/app/answer ... taxable%3F
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Gill
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Re: Tax question - VA Life Insurnace payout to owner

Post by Gill »

This is consider a matured life insurance policy and is normally a taxable event unless there is an exception for National Service Life Insurance of which I'm unaware. The taxable portion would be the difference between the proceeds and the original basis of the policy being premiums paid.
Gill
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RetiredAL
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Re: Tax question - VA Life Insurnace payout to owner

Post by RetiredAL »

Gill wrote: Sun May 16, 2021 4:13 pm This is consider a matured life insurance policy and is normally a taxable event unless there is an exception for National Service Life Insurance of which I'm unaware. The taxable portion would be the difference between the proceeds and the original basis of the policy being premiums paid.
Gill
Thank you Gill. This let me find the seed phrase I needed: Matured Endowment Policy

Following that search, it looks like the taxable income will only be a few hundred dollars.

An interesting insurance concept. Too bad congress killed the goose on this 40 years ago.
Rex66
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Re: Tax question - VA Life Insurnace payout to owner

Post by Rex66 »

Yep this is becoming a more common problem

You pay income rates on gains
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Stinky
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Re: Tax question - VA Life Insurnace payout to owner

Post by Stinky »

I understand the general concept that matured life insurance policies are subject to income tax.

But I note the following sentence from the website link from RickBoglehead above:

VGLI proceeds are exempt from taxation.

OP, I’d dig a little more if I were you. Please post back when you get a definitive answer.
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RetiredAL
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Re: Tax question - VA Life Insurnace payout to owner

Post by RetiredAL »

Stinky wrote: Sun May 16, 2021 7:25 pm I understand the general concept that matured life insurance policies are subject to income tax.

But I note the following sentence from the website link from RickBoglehead above:

VGLI proceeds are exempt from taxation.

OP, I’d dig a little more if I were you. Please post back when you get a definitive answer.
These policies pre-date the current VGLI that's offered. It's a "V" prefix policy. My Dad retired from the Navy in 1974.

VA's IRIS uses the term payments not taxable to the beneficiary. However, this payment is to the owner. Additionally IRIS says VA benefits are not taxable. If this a benefit? I Don't know.

The Annual VA Insurance statement uses the term "Whole Life". However the disbursement statement describes it as "Matured Endowment Policy" proceeds. The Original Insurance amounts matches between the annual statement and the disbursement statement. The Additional Add-on on the disbursement statement is just slightly more than last years annual statement. Since the annual dividend buys more insurance, those numbers seem in-line.

The best two search links I've found are:

How to report this: https://ttlc.intuit.com/community/taxes ... /00/579995

What it is: https://theinsuranceproblog.com/endowme ... ce-policy/

I want to know because having to pay a $40K tax bill based on full value, when Sis and I thought it would be tax free as beneficiaries, would be a pisser, but finding out next April without planning for it would be even worse. My best read right now is most (99%) is tax free. It seems Congress got rid of these because owner might/could benefit from the tax free growth. I had no idea this had an automatic payout at age 96 until I got the notice of pending payment.

My Dad's tax man owns a CPA/Accountancy/EA firm with a dozen or so professionals in the office. I'll lay odds he has the answer on the tip of his tongue.
Rex66
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Re: Tax question - VA Life Insurnace payout to owner

Post by Rex66 »

It’s up to each insurance company but many distribute at endowment. Some keep it inforce but don’t pay anything further

They don’t want to continue paying the guarantees on these old policies

They don’t care if you pay taxes
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Stinky
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Re: Tax question - VA Life Insurnace payout to owner

Post by Stinky »

RetiredAL wrote: Sun May 16, 2021 8:22 pm
Stinky wrote: Sun May 16, 2021 7:25 pm I understand the general concept that matured life insurance policies are subject to income tax.

But I note the following sentence from the website link from RickBoglehead above:

VGLI proceeds are exempt from taxation.

OP, I’d dig a little more if I were you. Please post back when you get a definitive answer.
These policies pre-date the current VGLI that's offered. It's a "V" prefix policy. My Dad retired from the Navy in 1974.

VA's IRIS uses the term payments not taxable to the beneficiary. However, this payment is to the owner. Additionally IRIS says VA benefits are not taxable. If this a benefit? I Don't know.

The Annual VA Insurance statement uses the term "Whole Life". However the disbursement statement describes it as "Matured Endowment Policy" proceeds. The Original Insurance amounts matches between the annual statement and the disbursement statement. The Additional Add-on on the disbursement statement is just slightly more than last years annual statement. Since the annual dividend buys more insurance, those numbers seem in-line.

The best two search links I've found are:

How to report this: https://ttlc.intuit.com/community/taxes ... /00/579995

What it is: https://theinsuranceproblog.com/endowme ... ce-policy/

I want to know because having to pay a $40K tax bill based on full value, when Sis and I thought it would be tax free as beneficiaries, would be a pisser, but finding out next April without planning for it would be even worse. My best read right now is most (99%) is tax free. It seems Congress got rid of these because owner might/could benefit from the tax free growth. I had no idea this had an automatic payout at age 96 until I got the notice of pending payment.

My Dad's tax man owns a CPA/Accountancy/EA firm with a dozen or so professionals in the office. I'll lay odds he has the answer on the tip of his tongue.
It sounds like you’re really up to speed on the ins and outs of the VA policy.

Let us know when you’ve got a solid answer to the tax question. You’ve piqued my curiosity.
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Rex66
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Re: Tax question - VA Life Insurnace payout to owner

Post by Rex66 »

https://ricomaha.com/the-risk-of-surviv ... know-copy/

Best of luck but I believe you are going to get stuck with a tax bill
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Stinky
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Re: Tax question - VA Life Insurnace payout to owner

Post by Stinky »

Rex66 wrote: Mon May 17, 2021 7:40 am https://ricomaha.com/the-risk-of-surviv ... know-copy/

Best of luck but I believe you are going to get stuck with a tax bill
That will be true, unless there is a legal exemption to such taxation for benefits from veteran's policies. That's implied, but by no means guaranteed, by the first link posted by RickBoglehead.

Hopefully OP will be able to enlighten us soon.
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