Delayed payment of proceeds from Life Assurance - how to record?

Michael Hendry hendry.michael at gmail.com
Thu Dec 25 11:01:55 EST 2014


> On 25 Dec 2014, at 14:05, Mike or Penny Novack <stepbystepfarm at mtdata.com> wrote:
> 
> 
>> 
>> If the premiums paid, less charges taken by the insurance co, amount to less than the amount returned is that a gain or loss where you are ?
>> 
> 
> While not professional in tax advice I was a professional in the life insurance industry and had studied enough for a FLMI designation. You have just given a perfect example of why professional help in your jurisdiction is needed.
> 
> Here (in the US, and in my state of Massachusetts, which also has an income tax) if the cash value minus premiums and minus surrender charges (if any) is positive would be a gain (other charges associated with the policy, the sales commissions, interest for paying the premium monthly rather than annually, etc. would not be deducted). If negative, would not be considered a deductible loss for tax purposes. Keep in mind that although cash value types of life insurance can be considered investment vehicles, particularly well suited to particular circumstances, still considered to be primarily "insurance" and so if negative that isn't a loss but can be considered cost of insurance coverage.
> 
> Here (in the US, and in my state of Massachusetts) life insurance has some special properties with respect to taxation. For example, who is receiving the money matters. For example, if the policy owner surrenders the policy for its cash value, that's one thing. But if the money is going to the beneficiary under the terms of the contract  it is quite different. In other words, insurance can be a legitimate means of "tax avoidance". Not "cheating on taxes" but having transformed an asset that if passed on in its original form would be taxed into another form that can pass to heirs untaxed. Also useful to allow family small businesses (a farm for example) to be passed down to the next generation and not having to be sold off to pay shares to other heirs or to pay estate taxes. I am putting this detail in because we have people here asking questions about accounting for small businesses and partnerships but I haven't yet seen questions  about accounting for this sort of thing. In fact, haven't had previous questions about "accounting for cash value life insurance".
> 
> Michael D Novack, FLMI


…and all I asked was how best to _record_ the late-paid surrender value of the policy, and the interest arising from the late payment!

The surrender of the policy in 2008 was based on the advice given, in Scotland, by my professional financial adviser and my accountant. I didn’t have to declare the proceeds for tax purposes then, and the advice that came with the cheque from the insurance company earlier this month made no mention of any tax liability arising from the proceeds. On the other hand, the insurance company has already paid income tax at the basic rate on the interest paid, and advised me that if I pay a higher rate of tax (or no tax at all) I’m liable to pay more (or reclaim some).

The time immediately following a traditional family Xmas Lunch with adequate premedication and a continuous supply of good wine is probably suboptimal for good bookkeeping, so I’ll defer judgement for an hour or two (perhaps even a couple of days!).

Thanks for all your contributions, and may you all prosper in 2015.

Michael




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