Replacement Tax Ramifications?

[nfl72]

I replaced a 38 year old NYLI 5k policy last week with a new 5K policy. The lady is getting a check for $3,797.00 which was her cash value. NYLI sent her a cash distribution form with a serious sounding warning about her having to pay $790 in income tax when she receives the money.

Is that true. she is retired and makes $750 per month. Her reason to replace is to use the cash to remodel her bathroom. Her old payment was $10 per month her new payment is $37 per month. she is 74 years old and very healthy.

And yes I know I should know the answer because I sell life insurance. I must have skipped that chapter when I studied for the test.

 

[Biggin]

I replaced a 38 year old NYLI 5k policy last week with a new 5K policy. The lady is getting a check for $3,797.00 which was her cash value. NYLI sent her a cash distribution form with a serious sounding warning about her having to pay $790 in income tax when she receives the money.

Is that true. she is retired and makes $750 per month. Her reason to replace is to use the cash to remodel her bathroom. Her old payment was $10 per month her new payment is $37 per month. she is 74 years old and very healthy.

And yes I know I should know the answer because I sell life insurance. I must have skipped that chapter when I studied for the test.

If she makes less than 20k per year it's unlikely that she'll be paying any income tax on that money.

 

[argar5]

I replaced a 38 year old NYLI 5k policy last week with a new 5K policy. The lady is getting a check for $3,797.00 which was her cash value. NYLI sent her a cash distribution form with a serious sounding warning about her having to pay $790 in income tax when she receives the money. Is that true. she is retired and makes $750 per month. Her reason to replace is to use the cash to remodel her bathroom. Her old payment was $10 per month her new payment is $37 per month. she is 74 years old and very healthy. And yes I know I should know the answer because I sell life insurance. I must have skipped that chapter when I studied for the test.

why didn't she just take a loan from the policy and pay the loan back or go to the bank and get a home remodeling loan.

 

[Biggin]

why didn't she just take a loan from the policy and pay the loan back or go to the bank and get a home remodeling loan.

Because he's not a banker? Lol

 

[PA Bill]

Her cash value must have exceeded the cost basis of the premiums she paid, thereby creating a taxable gain. The only way to avoid this would be through a loan. Of course, loans carry interest but NYL being a non-direct recognition company, the loan would not affect her dividend. Hope this helps.

 

[nfl72]

"To calculate your taxable income from the surrender, subtract your total premium payments from your cash value. Whatever is left over is taxable.

$4560 - $3797 = $763. Looks like there is a little liability."



If you subtract her payments made from her cash value you have a negative number. She paid in $4500 and her cv is les than that. Does that mean no taxable income?

 

[Norwayguy]

I replaced a 38 year old NYLI 5k policy last week with a new 5K policy. The lady is getting a check for $3,797.00 which was her cash value. NYLI sent her a cash distribution form with a serious sounding warning about her having to pay $790 in income tax when she receives the money.

Is that true. she is retired and makes $750 per month. Her reason to replace is to use the cash to remodel her bathroom. Her old payment was $10 per month her new payment is $37 per month. she is 74 years old and very healthy.

And yes I know I should know the answer because I sell life insurance. I must have skipped that chapter when I studied for the test.

$10 per month x 12 months per year = $120 x 38 years = $4,560.

 

[PA Bill]

"To calculate your taxable income from the surrender, subtract your total premium payments from your cash value. Whatever is left over is taxable.

$4560 - $3797 = $763. Looks like there is a little liability."



If you subtract her payments made from her cash value you have a negative number. She paid in $4500 and her cv is les than that. Does that mean no taxable income?

No gain, no tax. Something missing here. But maybe NYL made a mistake. If they did and you correct it, you'll be a hero.

 

[Biggin]

No gain, no tax. Something missing here. But maybe NYL made a mistake. If they did and you correct it, you'll be a hero.

Add that gain to her 750 a month income and I doubt there will be any income tax owed.

 

[PA Bill]

Add that gain to her 750 a month income and I doubt there will be any income tax owed.

You're right, as these funds are not treated as capital gains, but as income. But at least NFL can now explain it better in the future in case he runs into a prospect with more income. As NYL has no way of knowing her income, this was just a compliance type "cya" letter they send to everyone. I suspect the word "may" was in there somewhere.