US Tax on Life and Savings Insurance Bought Abroad

Is my overseas policy life insurance, an annuity, or an investment for US tax?

An overseas insurer's label does not settle the US tax result. For most contracts issued after section 7702 took effect, US life insurance treatment requires insurance status under applicable law and a section 7702 test. Older contracts and later exchanges need an issue-date check. An annuity and an investment contract have different payout rules.

Check three roles: the owner controls the policy, the insured person's death triggers the benefit, and the beneficiary receives it. Get the full contract and amendments. Ask the issuer for premium history, yearly cash values, death benefits, loans, withdrawals, riders, and investment choices. These records, rather than the sales illustration alone, support classification. If you directly own foreign funds instead, see Funds bought outside the US.

Does a cash-value policy go on the FBAR or Form 8938?

A foreign-issued life insurance or annuity contract with cash value can be reportable on both the FBAR and Form 8938. The IRS comparison lists it under both forms; filing one does not replace the other. Form 8938 goes with an IRS return; the FBAR is filed separately with FinCEN. Reporting the policy does not itself mean its growth is taxable.

If you do not have to file an income tax return, you do not have to file Form 8938, even if your assets exceed its threshold (instructions).

Ask the insurer for annual statements showing the highest cash value. Cash value is the policy's value available to its owner under its terms, distinct from the death benefit or projected maturity payment. Use it for the FBAR account value (IRS FBAR guidance); check Form 8938's year-end and annual-maximum tests separately (instructions). Keep the statements and currency conversions. A term policy with no cash value is not listed as a reportable insurance account in the IRS comparison; a separate investment right may still need review. For all thresholds and filing steps, see Foreign account reporting.

Is there US excise tax on premiums paid to a foreign insurer?

Premiums on a covered life policy or annuity issued by a foreign insurer may face a federal excise tax of 1%. The US Code covers a policy made, continued, or renewed with respect to the life or personal risks of a US citizen or resident. The Form 720 instructions say the premium payer files and pays; otherwise, the issuer, seller, or insured person can be required to do so.

Report covered premiums on Form 720, page 2, IRS No. 30. Quarterly returns are due April 30, July 31, October 31, and January 31, or the next business day if a due date falls on a weekend or legal holiday. Once you file, continue quarterly until you file a final return. Filers need an EIN (instructions).

Under section 4374, a person for whose use or benefit the policy was issued can also be liable. The IRS generally has three years after the required return is filed to assess the tax, but no time limit if no return is filed (section 6501).

Check who is insured, when the premium was paid, whether the issuer is a foreign insurer, and whether an exemption applies. A policy bought before moving to the US is not automatically exempt on later premiums. Section 4373 exempts effectively connected premiums unless a treaty exempts them from US income tax. Treaty relief also depends on the insurer and treaty terms; the IRS guidance describes additional conditions. A foreign insurer claiming treaty relief must disclose exempt premiums with its first-quarter Form 720, due April 30; it may use Form 8833 as its statement (instructions). Do not assume the insurer handled the tax for you.

Is growth taxed each year or when I take money out?

Growth inside a qualifying life insurance contract or annuity is generally not taxed to the owner merely because its cash value rises. A foreign policy that fails US insurance rules can produce current income even without a payout. Section 7702(g) and (h) treat income on a life or endowment contract under applicable law that fails the US life insurance test as ordinary income to the policyholder each year.

The annual calculation under section 7702(g) uses the change in net surrender value, the cost of insurance protection, and premiums paid. It is not simply the change shown on a sales illustration. If a variable contract lets you control its investments, the IRS investor-control ruling can instead treat you as the owner of those investments and their income. Contract classification must come before deciding whether the policy has current taxable income.

If a contract later fails the life insurance test, section 7702(g) can bring income from earlier policy years into the year it fails.

What is taxed when I withdraw, surrender, or reach maturity?

For a qualifying life policy, a complete cash surrender or lump-sum maturity generally produces ordinary income to the extent the payout exceeds your investment in the contract. IRS Publication 525 describes investment as premiums paid, adjusted for prior tax-free recoveries and unrepaid loans not included in income. A foreign issuer's failure to send a US tax form does not remove the income from your return.

For contracts entered into on or after June 21, 1988, a modified endowment contract is a life policy that meets the US life insurance test but fails a separate premium-funding test, or is received in exchange for such a contract. Older contracts and material changes need an issue-date review (section 7702A). Check this status before applying the usual withdrawal rule.

Do not subtract all premiums again if earlier tax-free withdrawals already recovered part of them. Keep a running record of premiums, distributions, loans, and any amounts previously taxed. Regular annuity payments use a different calculation that spreads recovery of investment across payments (IRS Publication 575).

An annuity withdrawal before age 59½ may also face the 10% additional tax on its taxable part. Exceptions include the holder's death, disability, qualifying periodic payments, and an immediate annuity (section 72(q)).

Before surrendering to buy another policy, check whether a qualifying contract-for-contract section 1035 exchange can defer gain. Life insurance can be exchanged for life insurance or an annuity; an annuity cannot be exchanged for life insurance tax-free. An exchange involving a foreign transferee needs separate review under subsection (c).

Does buying the policy before US tax residency change the answer?

Buying a policy before becoming a US tax resident does not, by itself, erase its later reporting duties or reset the owner's investment to its value on arrival. The Form 8938 instructions begin a new resident's reporting period on the US residency starting date. IRS Publication 519 taxes a resident on income from all sources during the resident part of a dual-status year.

For a later surrender, reconstruct the policy's full premium and distribution history, including payments before US residency; IRS Publication 525 describes cost using premiums paid, not the value when you moved. Untaxed employment contributions or earnings from a nonresident period can reduce investment under section 72(w). Whether any growth is current income after arrival still depends on the contract's classification. Determine the residency starting date in First year as a US tax resident.

If you are tax resident in both countries, a treaty tie-breaker can change US income tax and Form 8938 reporting. A dual resident claiming foreign residence must timely file the appropriate return with Form 8833; the Form 8938 instructions give the reporting exception. Check FBAR separately.

Is a death benefit taxable if my parents bought the policy?

A qualifying policy's death benefit is generally excluded from the beneficiary's US income when the insured person dies. A parent's ownership alone does not tell you whose death triggers payment (IRS Publication 525). Interest paid because the insurer holds the proceeds is taxable, and a policy transferred for value can have a limited exclusion (IRS life insurance guidance).

Being named as beneficiary does not by itself make you the policy owner during your parent's life. Form 8938 generally looks to whether income or proceeds from holding or disposing of the asset would be reflected on your return (instructions); the FBAR asks who holds a financial interest or signature authority (IRS comparison). Check whether you also own, control, or have been assigned the policy. If the contract fails the US life insurance test, section 7702(g) treats only part of its death payment as life insurance proceeds, so the payout needs separate review. A payment that is instead a foreign gift or inheritance belongs in Gifts and inheritances from abroad.

I never reported the policy: which missed filings should I identify?

First identify each year you were a US person or tax resident, who owned the policy that year, its cash value, premiums, and any payments. Then check the separate duties below before amending anything.

Gather the signed policy and amendments, ownership and beneficiary records, annual cash values, premium and payout history, insurer correspondence, prior US returns, and your residency dates. The correction route depends on whether income tax, FBAR, Form 8938, or Form 720 was missed; see Catching up on missed foreign reporting for the foreign-reporting part.

If investor control makes you the tax owner of foreign funds inside the policy, check whether they are PFICs that require Form 8621 (IRS ruling; Form 8621; Funds bought outside the US).

The FBAR is due April 15, with an automatic extension to October 15 (FinCEN); Form 8938 is due with the income tax return, including extensions (instructions). A missed Form 8938 can carry an initial $10,000 penalty and, if still unfiled 90 days after an IRS notice, another $10,000 per 30-day period, up to $50,000 more. Reasonable cause can remove the penalty (instructions).

Example

Illustrative amounts in US dollars. You bought a Hong Kong cash-value policy before becoming a US tax resident. You are unmarried, live in the US, and must file a US income tax return. The policy meets the US life insurance test, has $80,000 of cash value at year-end, and has no withdrawals. You also have $20,000 in a foreign bank account at year-end. Both the FBAR and Form 8938 are required because their separate combined-value tests are met. The rise in the policy's cash value alone creates no current income under the stated classification.

Suppose you pay a $5,000 premium after becoming a US resident, the policy covers a US person's life, and no exemption applies. The premium may carry $50 of Form 720 excise tax. If you personally paid $60,000 in total premiums over the policy's life, including the $5,000 and pre-residency premiums, and later surrender it for $90,000 with no earlier distributions or loans, the illustrative taxable gain is $30,000. A failed US life insurance test could mean income arose before surrender. Modified endowment status affects withdrawals and loans, and can add tax on an early surrender (IRS instructions).

Different for you?

• You hold a fund or can direct the investments inside a variable policy: see Funds bought outside the US and get individual tax help to classify the contract.
• You need the detailed FBAR or Form 8938 thresholds and filing steps: see Foreign account reporting.
• Your US residency began during the year: see First year as a US tax resident.
• A parent gave you the policy or left you a payment: see Gifts and inheritances from abroad; ownership transfers and death benefits need separate classification.
• You missed prior years or the policy may fail US insurance rules: see Catching up on missed foreign reporting and get individual tax help before choosing a correction route.