Arkansas Administrative Code › Agency 006 - Department of Finance and Administration › Division 05 - Division of Revenues › Regulation 1997-4 - Comprehensive Individual Income Tax Regulations › Rule 26-51-404 - GROSS INCOME GENERALLY › Rule 1.26-51-404(b)(3) - Life Insurance Proceeds

Current through Register Vol. 49, No. 6, June, 2024
Section 101 of the Internal Revenue Code of 1986, as in
					 effect on January 1, 1997 has been adopted for the purpose of excluding from
					 gross income the proceeds paid under life insurance policies on behalf of a
					 chronically ill, terminally ill or deceased insured. For treatment of
					 accelerated death benefits, see IRC Sec. 101(g)(1).
The proceeds of life insurance policies paid by reason of
					 the illness or death of an insured to his estate or to any beneficiary
					 (individual, partnership or corporation but not to a transferee for valuable
					 consideration), directly or in trust, are excluded from the gross income of the
					 beneficiary. It is immaterial whether the proceeds are received in a single sum
					 or in installments. If, however, such proceeds are held by the insurer under an
					 agreement to pay interest thereon, the interest payments must be included in
					 gross income. Amounts received (other than amounts paid by reason of the
					 illness or death of the insured and interest payments on such amounts) under a
					 life insurance, endowment or annuity contract are excluded from gross income,
					 but if such amounts (when added to amounts received before the tax year under
					 such contract) exceed the aggregate premium or consideration paid (whether or
					 not paid during the tax year) then the excess shall be included in gross
					 income.
Example 1:
Life insurance, endowment
					 contracts, amounts paid other than by reason of the death of the
					 insured.
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Example 2:
Under the terms of a life insurance
					 policy, the beneficiary had an option of receiving $10,000.00 in a lump sum
					 upon the death of the insured, or of receiving four (4) annual installments of
					 $2,630.00 based on a certain guaranteed interest rate. The beneficiary elected
					 to receive the installment method. During the first three (3) years, the
					 beneficiary will have received tax-free $7,890.00. The beneficiary, at the end
					 of the fourth year, will include in gross income the excess of amounts received
					 plus amounts received tax-free in previous years over the lump sum option or
					 $520.00 ($10,520.00 minus $10,000.00).
However, in the case of a transfer for a valuable
					 consideration, by assignment or otherwise, of a life insurance, endowment, or
					 annuity contract, or any interest therein, only the actual value of such
					 consideration and the amount of premium and other sums subsequently paid by the
					 transferee are exempt from taxation.
Example 3:
A taxpayer takes out a $20,000.00
					 life insurance policy. Six years later the surrender value of the policy is
					 $7,000.00, and at that time the taxpayer assigns the policy to Mr. Doe, a
					 creditor, for a consideration of $7,000.00. Mr. Doe pays $4,000.00 thereafter
					 in premiums as they come due. The taxpayer dies. Mr. Doe receives the
					 $20,000.00 insurance proceeds and has taxable income of $9,000.00 ($20,000.00
					 minus $7,000.00 and $4,000.00).
Example 4:
Life insurance, endowment contract
					 or annuities may be transferred for a consideration and the proceeds of the
					 contract payable to a transferee for reasons other than the death of the
					 insured. In 1994, transferee realized on maturity of the contract $75,000.00.
					 At time of transfer, transferee paid $40,000.00 for the contract and paid
					 subsequent premiums totaling $20,000.00.
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If the proceeds are received as an annuity over a fixed
					 number of years, the annual payment is excludable from income until the
					 aggregate payments equal the cost of the contract of $60,000.00.