Question

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations?

1) A loan is taken equal to 95
2) There is a cash withdrawal in excess of the cost basis
3) The policy is surrendered
4) The death benefit is paid

Answer 1

The situation with no tax implications for the owner of a variable life insurance policy is when the death benefit is paid to beneficiaries. Other actions such as cash withdrawals exceeding the cost basis or surrender of the policy would lead to taxable events. Loans against the policy are typically not taxable.

Step-by-step explanation:

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. Generally, there would be no tax implications if the death benefit is paid. Let's examine the four scenarios provided:

• A loan taken equal to 95% of the cash value: Loans against the policy's cash value are typically not taxable as long as the policy is in force.
• There is a cash withdrawal in excess of the cost basis: Withdrawals that exceed the cost basis (the amount of premium paid into the policy) are taxable.
• The policy is surrendered for its cash value: Surrendering the policy for the cash value results in a taxable event if the cash surrender value exceeds the cost basis.
• The death benefit is paid: Death benefits paid to beneficiaries upon the death of the insured are generally received income tax-free.

In the context of the question, the situation with no tax implications would be when the death benefit is paid to the beneficiaries of the variable life insurance policy.