Foreign Life Insurance Policy Taxation & the IRS
Foreign Life Insurance Taxation: The Foreign Life Insurance Taxation rules are complex. We represent clients worldwide before the IRS in the U.K., Australia, India, Singapore, China, and many other countries with overseas life insurance and ULIP (Unit Trusts). In recent years, the IRS has taken an aggressive approach to foreign accounts compliance and unreported offshore income. We have helped thousands of clients get compliant, and many of them will qualify for the Streamlined Program — either foreign or domestic.
There are typically four main reporting rules when it comes to Streamlined Filing.
- FBAR (FinCEN Form 114);
- FATCA Form 8938;
- Form 720 Excise Tax; and income tax.
- There may also be less common issues involving Form 8621 (PFIC) & Form 3520-A (Foreign Trust).
Is Foreign Life Insurance Taxable in the U.S.?
There are several Foreign Life Insurance Policy Taxation requirements. There are many reporting requirements for overseas policies. Whether or not the policy generates income or not does not impact the reporting filing and reporting requirements. The main determining factor about reporting, is whether or not the foreign policy has a cash value or surrender value that exceeds the threshold for reporting.
What is a Foreign Life Insurance Policy?
Generally, a foreign life insurance policy is simply a life insurance policy located overseas. Some common examples, include: AIA policy in Singapore; Prudential or ICICI policy in India; and Part of your Australian Superannuation
Unit Linked Insurance Plans
A Unit Linked Insurance Plan is a more complex investment, which includes both an investment component and insurance component (not always life insurance). As with most insurance policies, the “pay-in” is via premiums.
But, unlike pure insurance policies — there is a second “investment component” as well, which is commingled with the investment, to provide an investment component along with the life insurance coverage.
Examples of Unit Linked Life Insurance, include:
These are common life insurance policies, but they are not necessarily linked to an investment per se. There many flavors (linked and non-liked) and while some tend to take the shape more of “Life insurance” with some accrued interest — others are more investment focused linked insurance policies.
India LIC or Prudential
These may or may not have an investment component to it.
They can vary greatly depending on the type of policy.
When a U.S. Person is invested in these types of policies, and subject to U.S. Tax, they are referred to as “Expat Life Insurance.”
Friends Life (aka Aviva)
Personal Pension in the UK or UK Offshore, such as Guernsey.
It generally will contain funds and shares, so at the end of the day, this may be considered a PFIC.
Types of Foreign Life Insurance Income
Income is typically taxed as it is earned. The term “earned” is important, because earned income include both accrued and distributed income. In other words, whether or not the income was earned within the policy and/or distributed out of the policy, the tax rules are the same. It is a common misconception that income has to be distributed to be taxed.
Dividends are taxed as they are accrued. Depending on the specific country, the earnings may be subject to qualified dividend rules.
Bonus income is taxes as accrued.
Capital Gain Income
Capital Gains are taxed as they are accrued. Depending on the specific country, the earnings may be subject to long-and-short term capital gain rules.
Interest is taxed as it is accrued.
Which International Reporting Forms Are Filed for a Foreign Life Insurance Policy?
Here are the common (and less common) international reporting form used to report foreign life insurance policies
FBAR (FinCEN Form 114)
The FBAR is used to report foreign bank and financial accounts. The threshold for filing is relatively low. If a person has an annual aggregate value (in total of all accounts, policies, etc.) of more than $10,000, than they are required to report the FBAR. Remember, it is not per account — it is an aggregate value of ALL accounts.
FATCA Form 8938
The Foreign Account Tax Compliance Ac (FATCA)t is used to report specified foreign financial assets. The threshold for filing will vary based on various factors, such as filing status (Married, Single, Separate) and whether the person is a U.S. resident vs. foreign resident.
Form 720 (Excise Tax)
The Form 720 is used to report the payment of foreign life insurance premiums to the IRS. The Internal Revenue Service charges a 1% excise tax.
The Form 8621 is used to report Passive Foreign Investment Companies. The complex nature of a PFIC is beyond the scope of this article, but you can read more about PFIC here.
3520-A (Foreign Trust)
The Form 3520-A is used to report Foreign Trusts. The complex nature of foreign trust reporting is beyond the scope of this article, but you can read more about Foreign Trust Reporting here.
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