Loss on surrender life insurance policy

[Art]

I had originally posted this on the tread Lion started CSV on insurance policy. The question there had to do with a taxable gain.

What if the taxpayer had a loss on surrender of policy?

Facts:

Total cash value $17,913.26
Surrender Value $ 16,294.86
Premiums Paid $ 25,431.28
Cost Basis $ 27,673.00

The above info was sent by the insurance company to my client.. There were no loans on the policy and no interest credited. Would the $ 11,378.14 (cost basis less surrender value) be a deductible loss for tax puposes ? Where to take on the return ? I thought I had seen some discussion that there are two possible ways this might be handled. First, the more conservative approach was to put in on Sch A subject to 2% limit. A more aggressive approach was to take it as a ordinary loss. I would appreciate feedback from this Board.
Thanks,

Art

[dyne]

The loss is the cost of personal life insurance and NO deduction is allowed at all.

[Burke]

How in the world did they come up with a cost basis that exceeded what he paid in? I don't think that is correct anyway, but agree with dyne -- no deductible loss. The treatment you were discussing in your OP was probably referring to annuity contracts in which there was a basis.

[Art]

Thanks for the replies. I agree the numbers look screwy, but that is what the insurance company reported.

[Gary2]

How in the world did they come up with a cost basis that exceeded what he paid in?

A wild guess: Taxable dividends applied to premiums but not included in the "premiums paid" number?

The one thing I understand about insurance is that insurance companies do their best to make it difficult to understand.

[S T]

Insurance Cos

No doubt the question of cost basis vs original premiums is confusing on the OP

I am wondering if this is an Annuity or Variable Annuity and not Life Insurance, and there was an additional deposit made

Just a thought

Sandy

[Art]

Client just called back and clarified that this was a VUL not a simple whole life policy. My bad for not getting this initially.

Art

[Burke]

A wild guess: Taxable dividends applied to premiums but not included in the "premiums paid" number?

The one thing I understand about insurance is that insurance companies do their best to make it difficult to understand.

Dividends paid by a mutual life insurance company were never taxable. They were a return of premium. If he received stock dividends from a life insurance company which was not a mutual company, then they had nothing to do with contract basis.

[Burke]

Client just called back and clarified that this was a VUL not a simple whole life policy. My bad for not getting this initially.Art

Yes, a whole different animal. Find out what his initial deposit was. Did they send him a 1099-R?

[Art]

Client paid $ 4000 when he took out the policy 08/16/2000. He paid monthly payments of $ 200 until the policy was surrendered 01/08/2010.. The insurance company did not issue a 1099-R. The only figures they gave were as follows:

Total cash value $17,913.26
Loaned amount $ -0-
Surrender value $16,294.86
Net amt at risk (ins) $181,949.49
Specified amount (ins) $200,000.00
Death Benefit $200,000.00
Premiums paid $25,431.28
Cost Basis $27,673.00