Dividends on life insurance policies

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    Dividends on life insurance policies

    I have a life insurance policy from SBLI of Mass. which is all paid up but it pays me dividends that buy more life insurance.  I do not receive a 1099 from them, but each year in the middle of summer I do receive a letter that tells me how much more insurance I now have.  It doesn't clearly state how much money they paid me in dividends, because there are two amounts referred to in the letter - one less than $5, and one closer to $100.  IS ANY OF THIS TAXABLE AND SHOULDN'T THEY HAVE TO SEND ME THE FORM IF IT IS?  I see the note about not if the dividend is less than your premium but I no longer pay a premium.

     
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    Re: Dividends on life insurance policies

    In Response to Dividends on life insurance policies:
    [QUOTE]I have a life insurance policy from SBLI of Mass. which is all paid up but it pays me dividends that buy more life insurance.  I do not receive a 1099 from them, but each year in the middle of summer I do receive a letter that tells me how much more insurance I now have.  It doesn't clearly state how much money they paid me in dividends, because there are two amounts referred to in the letter - one less than $5, and one closer to $100.  IS ANY OF THIS TAXABLE AND SHOULDN'T THEY HAVE TO SEND ME THE FORM IF IT IS?  I see the note about not if the dividend is less than your premium but I no longer pay a premium.
    Posted by mmmz[/QUOTE]

    Dear mmmz:

    For many years, the only insurance companies were those organized as MUTUAL insurance companies.  Like Credit Unions, they were owned by the people to whom insurance policies were issued.  As time went by and the company accunulated money in excess of the amounts they computed were needed to cover claims and expenses, known as "surplus", they would return this excess to the policyholders (the owners of the company) and they called these payments "DIVIDENDS".  When stock insurance companies (owned by their stockholders, not their policyholders) came along, they used the same terminology.  For tax purposes, although these payments are labeled "dividends", they are not categorized as such FOR TAX PURPOSES.  In fact, they are a RETURN OF PREMIUMS paid by the policyholder.  Until and unless  the total of the dividends returned to you exceed the AGGREGATE of premiums paid for the policy, you will have no taxable income to report.  If, as you are doing, you say to the company, "please use this return of my money to buy more paid-up insurance on my life", you will never have taxable income to report.

    Hope this helps in preparing your return!

    Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal
    Katz, Nannis + Solomon, P.C.
     
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