Thursday, February 19, 2009
he following circumstances result in proceeds of disposition for a policyholder and therefore a potential capital gain: (a) full or partial surrender of the policy, (b) a policy loan, (c) policy dividends, and (d) certain transfers of ownership of the policy.
The full surrender of a life insurance policy results in a capital gain equal to the policy's cash surrender value (CSV) less its adjusted cost base (ACB). Where there is a partial surrender, there is a pro-rated capital gain if the total CSV exceeds the ACB.
Loan amounts received from the insurer under the terms of the policy are included as proceeds. Loans and debts with third-parties are not included, nor is the assignment of the policy as collateral for a loan or debt.
Policy dividends are included as proceeds; however, where the dividend is used to pay premiums, the amount is not included.
With certain exceptions, the transfer of a policy to another owner is a disposition with proceeds equal to the CSV.
Posted 2009/02/19 at 17h17ET in Estate Planning.