Are you familiar with IRC Section 101(j)? Most insurance producers aren’t (it’s OK, so read on).
The fact is, it’s kind of an obscure law that many agents, including some carriers at the time the law passed, had no clue what it was!
The bottom line is it could be a ticking “tax time bomb” that could have serious consequences for many businesses who have “business-owned” life insurance on their books.
What Is It?
With IRC codes, private letter rulings and all the other mumbo-jumbo that goes into explanations of this type, I’ll keep this simple.
If it gets a little dry or technical, I apologize, but it’s pretty important stuff.
If you have a client whose business owns life insurance on an employee and the business is the beneficiary, read on.
- Simply put, 101(j) is a law that has the potential to create negative income tax consequences for your business life insurance clients.
- With the enactment of IRC Section 101(j), some of the tax treatment for life insurance owned by a business has changed.
- Death benefits on policies insuring employees of a business may be taxed as income unless the new rules are followed.
- And since IRC Section 101(j) applies to policies purchased on or after August 17, 2006 -- as well as to material modifications of policies purchased prior to that date -- there may be good reason for some agents to be worried.
Should You Be Concerned?
Imagine getting a call from one of your business clients who tells you that they just received a letter from the IRS indicating that the policy proceeds that they recently paid to their business on the life of one of their employees is taxable (remember, you probably told them that death benefits would be received income tax-free!).
That's the type a phone call no agent ever wants to get.
Since August 2006, the new regulation states that if a business-owned life insurance policy was written on an employee and proper “notice and consent” was not executed prior to the policy being issued, the policy proceeds payable to the business could be subject to income taxes.
If your client falls into this category, he’s not not going to to be very happy.
And my bet is that the client will point fingers at the person who gave them “advice” when they purchased the policy.
Could that be you? (Some of you may work with businesses where the policy was sold by some other agent.)
Whether you sold your client the policy or someone else did, now’s the time to open up a discussion about 101(j) with “at-risk” business owners.
The good news is that there’s a potential fix if a business did purchase life insurance on an employee after 2006, and the proper documentation was not completed at the time of the sale.
Get Help
The best solution to this problem is to contact a General Agent for advice.
The fact is, most major carriers are now keenly aware of the situation and have advised their General Agents as to how they can help their customers.
Once you get in touch with your GA, you’ll learn exactly what circumstances may put your client in jeopardy and what remedies are available to them.
And if you didn’t write the original case, can you say “new-client opportunity?”
