This was originally published on PAOO on September 13th, 2010.
Previously I have waxed, eloquently (at least by my lights). on the tax advantages of life insurance. The build-up in value is tax-deferred and if it is realized by the death of the insured, it is tax-free. I also indicated that any complicated plan involving life insurance usually merits scrutiny, since frequently the actual point of the plan is make a sale.
The case of Gerlie V. Richard et ux TCM 2010-159 provides a cautionary tale. They received some life insurance without having to go out of pocket in the first year. Apparently the commission on the policies ranged between 110% and 145% of the first year premium.
Eagle Financial Group, Inc, by some sort of wild coincidence a company owned by the agent who sold the policies, issued them a check in the amount of the first year’s premium. They issued a recourse note in the amount of the premium advance to Eagle. There were, however, never any payments made on the note. The policies were canceled in 2003 and Mr. Smith, the agent, was sued by Ohio National Insurance Co for “rebating”.
Here is the cautionary part of the tale. The tax court ruled that the loan was not bona fide. Therefore, the Rickards were taxable on the rebate and owe $75,966 in income tax for 2001. Ouch.