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
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.
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.
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.
