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Section: Client Services

Client Services
  • Can you explain how the gain was calculated for my life policy?

    Premiums paid into the policy are reduced by the dividends earned by the policy for the purposes of calculating the cost basis (or tax-free amount). The taxable gain is the value of the contract reduced by the cost basis. Thus, the smaller the cost basis, the larger the taxable gain.

  • How can the taxable amount be greater than the gross distribution of the surrender/lapse?

    The taxable amount is based on the guaranteed cash value - not the proceeds. The guaranteed value includes the amount of the surrender as well as any unpaid policy loans.

  • If I reported interest each year, why do I have to report the gain on policy surrenders?

    Dividends are not taxable when they are earned since they are a return of premium. When the policy is surrendered, the taxable gain calculation includes the dividends. However, since we already reported the tax on the interest every year (Form 1099-INT), the interest is excluded from the taxable gain calculation.

  • The policy was terminated as a 1035 exchange. Why did I receive a tax form?

    You receive the tax form due to the following:

    • Even though a distribution is reportable, it does not necessarily mean it is taxable. All 1035 exchanges are reportable and the distribution code of ‘6’ (found in box 7 of the Form 1099-R) indicates to the IRS it was a tax-free 1035 exchange.
    • In addition, if it was a policy with a loan at the time of the 1035 exchange, IRS regulations require us to calculate and report the taxable gain in the year of the exchange.
  • The withdrawal from my annuity was for ‘hardship’. Why was the ‘Distribution Reason’ in Box 7 coded as a ‘Pre-mature Distribution’ and subject to the 10% IRS penalty?

    We do not determine your eligibility for hardship or other special tax treatment. You would provide the IRS the required information when you file your tax return. The codes used reflect your age at distribution.

  • I converted my policy or transferred the money from my traditional life policy into a universal life policy. Why did I get a 1099R tax form?

    IRS regulations require the full value of a traditional policy to transfer at the time of the issue of the universal policy.

  • My policy lapsed for non-payment of premium during the year, but I did not receive any money. Why did I get a tax form?

    If a policy has a loan and it lapses for non-payment of premium, the policy’s non-forfeiture provision goes into effect (either ‘Paid-up’ or ‘Extended Term’). The loan is then forgiven, but a reportable event occurs. IRS regulations require that we report the gain on policies that enter their non-forfeiture provision when there is an outstanding loan.

  • Why did I get a 1099R when I rolled my IRA distribution into another IRA within the 60 days allowed by the IRS?

    We must report the distribution if it was a direct payment to you. It is up to you to show that you deposited the money into an allowable product (e.g., IRA) within the 60-day time period. A 5498 from the receiving company should be issued.

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