IRS reviews life insurance benefits paid to terminally ill.

• Author: Walker, Deborah
• Position: Brief Article

The IRS is reviewing tax issues relating to life insurance benefits paid to the terminally ill under a relatively new form of life insurance. The Service is questioning whether distributions from these new policies meet the requirements for exclusion from gross income under Sec. 101(a) and, more importantly, whether the policies are "life insurance contracts" as defined in Sec. 7702.

The life insurance products in question go by various names - life insurance for the living, living needs policies and accelerated death benefits. Like traditional life insurance, living needs policies pay beneficiaries on the death of the insured. However, they also provide for a predeath payment to the insured if the insured meets certain health-related conditions.

In general, Sec. 101(a) provides that proceeds of life insurance contracts paid by reason of the death of the insured are not included in gross income. Because of the need to pay amounts by reason of death, it seems likely that amounts paid by reason of pending death will not be excludible.

Sec. 7702...