Cashing In On Transamerica Life Insurance: A Step-By-Step Guide

Transamerica Financial Life Insurance Company offers a flexible premium variable life insurance policy. The policy allows the policyholder to allocate the cash value to the fixed account or the TFLIC Series Life Account, which invests in portfolios of the AEGON/Transamerica Series Fund, Inc. and the Fidelity Variable Insurance Products Fund. The policy offers a range of benefits, including a death benefit, cash withdrawals, and policy loans. The policy also provides supplemental benefits through riders, such as the Inflation Fighter Rider Level Premium, which increases the specified amount of coverage over time. To cash in the policy, the policyholder can surrender the policy and receive the net surrender value, which is the cash value minus any surrender charges, outstanding loan amounts, and accrued loan interest. It is important to consider the potential tax implications and fees associated with cashing in the policy.

Cash withdrawals and surrenders

You may take one withdrawal of cash value per Policy year after the first Policy year. The amount of the withdrawal may be limited to:

• No more than 10% of the net surrender value.
• Policy year, the amount of a withdrawal may be limited to no less than $500 and to no more than the net surrender value less $500.

We will deduct a processing fee equal to $25 or 2% of the amount you withdraw (whichever is less) from the withdrawal, and we will pay you the balance.

A cash withdrawal will reduce the cash value by at least the amount of the withdrawal. If the death benefit on your Policy is Option A, or if your death benefit is Option C and the insured’s attained age is 71 or older, then we will reduce the specified amount by the amount of cash withdrawal.

You may fully surrender the Policy at any time before the insured’s death. Life insurance coverage will end. You will receive the net surrender value. The surrender charge will apply to the Policy during the first 10 Policy years and during the first 10 years of any increase in specified amount. The surrender charge may be significant. You may receive little or no net surrender value if you surrender your Policy in the early Policy years.

If you have the Inflation Fighter Rider Level Premium, any withdrawal or requested decrease in specified amount of the Policy will cause the rider to terminate and annual scheduled specified amount increases to stop.

A cash withdrawal will reduce the cash value, so it will increase the risk that the Policy will lapse. A cash withdrawal may also increase the risk that the no lapse period guarantee will not remain in effect.

Federal income taxes and a penalty tax may apply to cash withdrawals and surrenders.

We intend the Policy to satisfy the definition of life insurance under the Internal Revenue Code so that the death benefit generally should be excludible from the taxable income of the beneficiary. In addition, if the Policy is a Modified Endowment Contract (MEC), you should not be deemed to be in receipt of any taxable gains on cash value until you take a withdrawal or Policy loan, or assign, pledge, or surrender the Policy. Moreover, transfers between the subaccounts are not taxable transactions.

Surrender charge

For annuities and life insurance, the surrender fee often starts at 10% if the policy is cashed in during the first year. This fee decreases over time, with a 1% fee charged if the policy is cashed in during the ninth year, and no surrender fee charged if the policy is cashed in after 10 years. Surrender charges for mutual funds typically only apply for a few months rather than years.

There are a few ways to avoid surrender charges. One way is to take out a small amount each year, as many annuities allow for a free withdrawal of up to 10% without incurring an additional surrender fee. Another way to avoid surrender charges is to wait them out, as they decrease over time. Additionally, surrender charges may be waived in the event of the policyholder's death or if the owner of the annuity becomes disabled or seriously ill.

It is important to note that cash value in whole and universal life insurance policies grows tax-deferred. However, once the cash value is withdrawn from the policy, taxes may be owed if the amount received exceeds the sum of the premiums paid into the policy.

Policy lapse and reinstatement

Your Transamerica life insurance policy includes a no-lapse guarantee, which means that your policy will not lapse before the no-lapse date stated in your policy schedule, as long as you have paid sufficient minimum monthly guarantee premiums. The no-lapse period guarantee will not be effective if you do not pay sufficient minimum monthly guarantee premiums.

If you take a cash withdrawal or a loan, or if you increase or decrease your specified amount, if you change the death benefit option, or if you add, increase or decrease a rider, Transamerica will adjust the minimum monthly guarantee premium accordingly and notify you of the new amount. If the new amount is higher than it was before and you do not make any necessary higher premium payments, you will increase the risk of losing the no-lapse period guarantee.

Transamerica will deduct the total amount of your withdrawals, any outstanding loan amount, including accrued loan interest from your premiums paid when determining whether your premium payments are high enough to keep the no-lapse guarantee in effect.

You will lessen the risk of Policy lapse if you keep the no-lapse guarantee in effect. Before you take a cash withdrawal, loan, increase or decrease the specified amount or add, increase or decrease a rider, you should consider carefully the effect it will have on the no-lapse period guarantee.

After the no-lapse period, your Policy may lapse if loans, cash withdrawals, the monthly deductions, and insufficient investment returns reduce the net surrender value to zero. The Policy will enter a grace period if on any Monthiversary the net surrender value (that is, the cash value minus the surrender charge, and minus any outstanding loan amount and accrued loan interest) is not enough to pay the monthly deduction due.

A Policy lapse may have adverse tax consequences.

You may reinstate this Policy within five years after it has lapsed, if the insured meets the insurability requirements and you pay the amount Transamerica requires.

Federal income tax considerations

The TFLIC Freedom Elite Builder II is an individual flexible premium variable life insurance policy. The policy is designed to be long-term in nature to provide significant life insurance benefits. The policy's cash value will increase or decrease depending on the investment performance of the subaccounts, the premiums paid, the fees and charges deducted, the interest credited to the fixed account, and the effects of any policy transactions.

The policy is expected to be deemed a life insurance contract under federal tax law, and the death benefit paid to the beneficiary is generally not subject to federal income tax. However, depending on the total amount of premiums paid, the policy may be treated as a modified endowment contract (MEC) under federal tax laws. If the policy is treated as a MEC, partial withdrawals, surrenders, assignments, pledges, and loans will be taxable as ordinary income to the extent there are earnings in the policy. Additionally, a 10% penalty tax may be imposed on the taxable portion of cash withdrawals, surrenders, pledges, and loans taken before the owner reaches the age of 59 1/2.

Policy loans, whether or not repaid, will affect the cash value over time. The loan amount is subtracted from the subaccounts and the fixed account and placed in a loan reserve as collateral, credited with a fixed interest rate. As a result, the loan collateral does not participate in the investment results of the subaccounts and may not benefit from the same interest rates credited to the unloaned portion of the fixed account.

A policy loan could increase the risk of lapse if the loan, insurance charges, and unfavorable investment experience reduce the net surrender value to zero. A policy lapse may have adverse tax consequences.

If the policy lapses or is surrendered while a loan is outstanding, the owner will realize taxable income equal to the lesser of the gain in the policy or the sum of the excess of the loan balance and any cash received over the owner's basis in the policy. If the policy is treated as a MEC or becomes a MEC within two years of taking a loan, the amount of the outstanding loan will be taxed as if it were a withdrawal from the policy.

The policy may also lapse or terminate due to volatility in the investment performance of the underlying portfolios, resulting in unexpected tax consequences. It is recommended that the owner consult with a qualified tax advisor to understand the potential tax implications associated with the policy.

Tax status of the policy

The tax status of a life insurance policy can vary depending on several factors, including the country or region, the type of policy, and the specific circumstances of the policyholder and beneficiaries. Here is some information regarding the tax status of life insurance policies in the United States and India:

United States

In the United States, the taxability of life insurance proceeds depends on various factors, including the type of policy, the relationship between the insured and the beneficiary, and the amount received. Here are some key points to consider:

• Beneficiary Receives Proceeds Due to Insured's Death: Generally, life insurance proceeds received by a beneficiary due to the death of the insured person are not includable in gross income and do not need to be reported as taxable income.
• Interest on Proceeds: Any interest received on the proceeds is taxable and should be reported as interest income.
• Transferred Policy: If the policy was transferred to the beneficiary for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration paid, additional premiums paid, and certain other amounts. There may be exceptions to this rule.
• Reporting and Forms: The taxable amount is typically reported based on the type of income document received, such as a Form 1099-INT or Form 1099-R. For more detailed information, refer to IRS Publication 525, "Taxable and Nontaxable Income."
• Withholding Tax: Federal income tax may be withheld from the life insurance proceeds, and this can impact the tax liability of the beneficiary.

India

The tax implications of life insurance policies in India have been updated as per the Union Budget 2023. Here are the key points:

• Taxable Proceeds: Income received from insurance policies (excluding unit-linked policies) issued on or after April 1, 2023, with an annual premium or aggregate premium exceeding Rs. 5 lakh, will be taxable, except in the case of the death of the insured.
• Deductions: Under Section 80C of the Income Tax Act, 1961, an individual or a Hindu Undivided Family (HUF) can claim deductions for life insurance premium payments up to Rs. 1.5 lakh per year. This deduction is available for premiums paid to insure the life of oneself, one's spouse, or children.
• Exemptions: Under Section 10(10D) of the Income Tax Act, the maturity/death proceeds received from a life insurance policy are fully exempt from tax if the premium paid does not exceed certain thresholds relative to the sum assured. For policies issued after April 1, 2012, the premium should not exceed 10% of the sum assured. For policies issued before this date, the threshold is 20% of the sum assured.
• TDS on Proceeds: If the amount received from a life insurance policy exceeds Rs. 1 lakh and is not exempt under Section 10(10D), the insurer is required to deduct TDS (Tax Deducted at Source) at a rate of 5% before making the payment.
• Single-Premium Policies: If the premium paid on a single-premium policy exceeds 10% of the sum assured, the maturity proceeds are generally taxable, and the exemption under Section 10(10D) may not apply.

Please note that tax laws and regulations can change over time, and it is always advisable to consult the latest official sources and seek professional tax advice for the most accurate and up-to-date information.

Frequently asked questions