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What Is It?

If your life insurance policy is a participating policy, then you are entitled to receive shares--a dividend--of the divisible surplus of the insurer at the end of the business year. The dividend is, in effect, your share of the insurer's earnings. Good earnings figures result from successful investments, positive claims experience, and careful management of expenses.

How Are Dividends Treated For Tax Purposes?

Generally, Dividends Are Not Taxable Income to You

Dividends are generally not taxed as income to you. They are deemed a return of your premiums (up to the total amount of premiums paid) regardless of whether you receive them in cash, use them to purchase paid-up additions to your policy, use them to reduce future premiums, or leave them invested with the insurer.

Caution: The taxation of dividends is treated differently if the policy is a modified endowment contract (MEC).

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Dividends Received In Excess of Total Premiums Paid Are Taxable

When the dividend received plus all previous non-taxable distributions from the contract exceed the total of all premiums and other consideration paid for the contract, then the excess is included in your gross income for tax purposes. At that point, you have recouped your costs and the remainder is income to you. These dividends are generally taxable as ordinary income. Dividends paid by mutual life insurance companies are not eligible for capital gains tax treatment.

Is Interest on Dividends Taxable Income?

If you leave your dividends on deposit with your insurer and you earn interest on those dividends, the interest is taxable income to you (you will receive a Form 1099 from your insurer), provided there are no substantial limitations on your right to withdraw the dividend interest. Under the tax regulations, it is not a substantial limitation if:

  • You are required to withdraw interest in even amounts
  • You are required to withdraw all, or a specified portion of, your dividend account
  • You are required to give notice in advance of a withdrawal
  • A higher rate of interest would be paid in the year following the current taxable year

Technical Note: When dividend interest is used to increase the payment under the life insurance policy, it is added to your cost basis for computing income tax due upon subsequent surrender or conversion of the policy.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

 

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.



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Tags: Financial Planning, Lump Sum, Pension, Retirement Planning