Publication 554 - Older Americans' Tax Guide - 2002 Page 14
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29pension. Report them on lines 16a and 16b of Form 1040
ceived under the contract and excluded from your income.
or on lines 12a and 12b of Form 1040A.
Include the part of the lump-sum payment that is more than
your cost in your income.
Endowment proceeds that you choose to receive in
Life Insurance Proceeds
installments instead of a lump-sum payment at the maturity
of the policy are taxed as an annuity. This is explained in
Publication 575. For this treatment to apply, you must
Life insurance proceeds paid to you because of the death
choose to receive the proceeds in installments before
of the insured person are not taxable unless the policy was
receiving any part of the lump sum. This election must be
turned over to you for a price. This is true even if the
made within 60 days after the lump-sum payment first
proceeds were paid under an accident or health insurance
becomes payable to you.
policy or an endowment contract.
Proceeds not received in installments. If death benefits
Accelerated Death Benefits
are paid to you in a lump sum or other than at regular
intervals, include in your income only the benefits that are
Certain payments made as accelerated death benefits
more than the amount payable to you at the time of the
under a life insurance contract or viatical settlement before
insured person’s death. If the benefit payable at death is
the insured’s death are excluded from income if the in-
not specified, you include in your income the benefit pay-
sured is terminally or chronically ill. See Exception later.
ments that are more than the present value of the pay-
For a chronically ill individual, the payments must be for
ments at the time of death.
costs incurred for qualified long-term care services or
made on a periodic basis without regard to the costs.
Proceeds received in installments. If you receive life
In addition, if any portion of a death benefit under a life
insurance proceeds in installments, you can exclude part
insurance contract on the life of a terminally or chronically
of each installment from your income.
ill individual is sold or assigned to a viatical settlement
To determine the excluded part, divide the amount held
provider, the amount received also is excluded from in-
by the insurance company (generally the total lump sum
come. Generally, a viatical settlement provider is one who
payable at the death of the insured person) by the number
regularly engages in the business of buying or taking
of installments to be paid. Include anything over this ex-
assignment of life insurance contracts on the lives of in-
cluded part in your income as interest.
sured individuals who are terminally or chronically ill.
Installments for life. If, as the beneficiary under an
To claim an exclusion for accelerated death benefits
insurance contract, you are entitled to receive the pro-
made on a per diem or other periodic basis, you must file
ceeds in installments for the rest of your life without a
Form 8853, Archer MSAs and Long-Term Care Insurance
refund or period-certain guarantee, you figure the ex-
Contracts, with your return.
cluded part of each installment by dividing the amount held
by the insurance company by your life expectancy. If there
Terminally or chronically ill defined. A terminally ill per-
is a refund or period-certain guarantee, the amount held by
son is one who has been certified by a physician as having
the insurance company for this purpose is reduced by the
an illness or physical condition that reasonably can be
actuarial value of the guarantee.
expected to result in death within 24 months from the date
Surviving spouse. If your spouse died before October
of the certification. A chronically ill person is one who is not
23, 1986, and insurance proceeds paid to you because of
terminally ill but has been certified (within the previous 12
the death of your spouse are received in installments, you
months) by a licensed health care practitioner as meeting
can exclude up to $1,000 a year of the interest included in
either of the following conditions.
the installments. If you remarry, you can continue to take
•
The person is unable to perform (without substantial
the exclusion.
help) at least two activities of daily living for a period
of 90 days or more because of a loss of functional
Surrender of policy for cash. If you surrender a life
capacity.
insurance policy for cash, you must include in income any
•
proceeds that are more than the cost of the life insurance
The person requires substantial supervision to pro-
policy. You should receive a Form 1099 –R showing the
tect himself or herself from threats to health and
total proceeds and the taxable part. Report these amounts
safety due to severe cognitive impairment.
on lines 16a and 16b of Form 1040, or lines 12a and 12b of
Form 1040A.
Exception. The exclusion does not apply to any amount
paid to a person other than the insured if that other person
Endowment Proceeds
has an insurable interest in the life of the insured:
•
Endowment proceeds paid in a lump sum to you at matur-
Because the insured is a director, officer, or em-
ity are taxable only if the proceeds are more than the cost
ployee of the other person, or
of the policy. To determine your cost, add the aggregate
•
Because the insured has a financial interest in the
amount of premiums (or other consideration) paid for the
contract and subtract any amount that you previously re-
business of the other person.
Page 14
Chapter 2 Taxable and Nontaxable Income
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