Foreign Life Insurance: Fbar Reporting Requirements

Foreign life insurance policies are reportable on the FBAR form, but only if they meet certain criteria. The FBAR (FinCEN Form 114) is the Foreign Bank and Financial Account form, and a foreign life insurance policy is considered a foreign financial account if it is owned by a U.S. person and has a cash surrender value. If the policy has no cash surrender value, it does not need to be reported. If it does have a cash surrender value, then the dollar amount reported is the potential cash surrender amount, not the face value of the life insurance policy upon payout.

Foreign life insurance policies are reportable on FBAR and Form 8938

The FBAR rules for reporting foreign life insurance policies are complex. The IRS requires US persons who own a foreign life insurance policy to report the policy annually on an FBAR if it meets the threshold reporting requirement. This is the case when the policy has a cash value. The cash or surrender value is included on the FBAR each year that the threshold is met. The surrender value is the current "cash" value of the policy, i.e., the value that the owner of the policy can “surrender” or turn in to the insurance company, and receive a value in exchange for surrendering the policy and the rights associated with it.

The policy is also reported on Form 8938 (FATCA) and Form 720. Foreign life insurance policies that are “unit-linked” and include an investment component may be designated a PFIC, and additional reporting requirements on Form 8621.

If the foreign policy is not reported, it may lead to offshore penalties, such as FBAR Penalties. These penalties can be avoided with FBAR Amnesty and other amnesty programs, collectively referred to as voluntary disclosure.

The reporting requirements are for the policy holder, not the beneficiary

Foreign life insurance policies are considered by the IRS to be a type of foreign account. Therefore, they must be reported by the policyholder on an FBAR (FinCEN Form 114) if certain criteria are met. The reporting requirements are for the policy holder, not the beneficiary.

The FBAR rules for reporting foreign life insurance policies are complex. The IRS requires U.S. persons who own a foreign life insurance policy to report the policy annually on an FBAR if the policy has a cash value and meets the threshold reporting requirement. The threshold is $10,000, meaning that if the cash surrender value is below this amount, the policy does not need to be reported. If the cash surrender value is above $10,000 at any point during the year, the policy must be reported.

The FBAR reporting requirements are in addition to other international information reporting forms that may be required, such as Form 8938 (FATCA) and Form 720. If the foreign life insurance policy is a "unit-linked" policy that includes an investment component, additional reporting requirements on Form 8621 may also apply.

It's important to note that not all foreign life insurance policies need to be reported on the FBAR. The policy must have certain attributes, such as a cash or surrender value, to be considered reportable.

Foreign life insurance policies are considered foreign financial accounts if owned by a US person and have a cash surrender value

The IRS requires US person owners of a foreign life insurance policy to report the policy annually on an FBAR. The cash or surrender value is included on the FBAR each year that the threshold is met. The policy is also reported on Form 8938 (FATCA) and Form 720. If the foreign policy is not reported, it may lead to offshore penalties such as FBAR Penalties. These penalties can be avoided with FBAR Amnesty and other amnesty programs, collectively referred to as voluntary disclosure.

Not all foreign life insurance policies have to be reported. Generally, the FBAR form must be filed in a year in which the foreign policy has a "Cash Value" or "Surrender Value", and the reporting threshold is met. The Surrender Value is the current "cash" value of the life insurance policy. For example, if an individual paid $50,000 and then premiums each year, with a payout of $2,000,000 in 30 years, the surrender value is the value that the owner of the policy can "surrender" or turn in to the insurance company, receiving a value in exchange for surrendering the policy and the rights associated with it.

The failure to report foreign life insurance may result in fines and penalties, but most of these can be avoided with IRS offshore voluntary disclosure/tax offshore amnesty programs. U.S. persons owning foreign financial accounts with values in excess of $10,000 at any point during the year are required to file FinCEN 114, commonly known as FBAR, with the Financial Crimes Enforcement Network (“FinCEN”) on a yearly basis.

If the cash surrender value is below the $10,000 threshold, it does not need to be reported

Foreign life insurance policies are considered "foreign financial accounts" and are subject to reporting requirements on the Report of Foreign Bank and Financial Accounts (FBAR) if they meet certain criteria. The reporting requirements are complex and depend on several factors, including the value of the policy, the country where the policy was purchased, and the specific terms of the policy.

If the cash surrender value of a foreign life insurance policy is below the $10,000 threshold, it is generally not required to be reported on the FBAR. The FBAR is a form used by the US government to identify foreign financial accounts held by US persons, and it must be filed annually with the Financial Crimes Enforcement Network (FinCEN). The reporting threshold for foreign financial accounts is $10,000, meaning that any account with a value exceeding this amount at any point during the year must be reported. This includes foreign life insurance policies that have a cash surrender value.

The cash surrender value of a life insurance policy is the amount that the policyholder would receive if they were to cancel the policy before it matures. It is different from the face value of the policy, which is the amount paid out to beneficiaries upon the insured's death. If a foreign life insurance policy has a cash surrender value, then this value must be reported on the FBAR, not the face value of the policy.

However, if the cash surrender value of the foreign life insurance policy remains below $10,000 for the entire year, it is not considered a reportable foreign financial account. In this case, there is no requirement to include it on the FBAR. It's important to note that this threshold applies to the aggregate value of all foreign financial accounts held by an individual. So, if a person has multiple foreign financial accounts, including life insurance policies, with a total value exceeding $10,000 at any point during the year, all of these accounts must be reported, even if each individual account is below the threshold.

It's worth mentioning that while beneficiaries of foreign life insurance policies generally don't have to report them on their FBAR, owners of these policies must report them annually. This is because beneficiaries typically don't have an ownership interest in the policy and can be removed at any time by the owners.

The IRS has taken an aggressive approach to foreign accounts compliance

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by Congress to target non-compliance by US taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest.

In recent years, the Internal Revenue Service has taken an aggressive approach to foreign accounts compliance. This includes reporting offshore accounts, assets, investments, and life insurance policies. The IRS requires US person owners of a foreign life insurance policy to report the policy annually on an FBAR. The cash or surrender value is included on the FBAR each year that the threshold is met. In addition, the policy is also reported on Form 8938 (FATCA) and Form 720.

Foreign life insurance policies that are "unit-linked" and include an investment component may be designated a PFIC, and additional reporting requirements on Form 8621. If the foreign policy is not reported, it may lead to offshore penalties, such as FBAR Penalties. These penalties can be avoided with FBAR Amnesty and other amnesty programs, collectively referred to as voluntary disclosure.

The FBR rules for reporting life insurance for foreign policies are very complex. Technically, the policy will have an identifier, which is then reported as an account number on the FBAR (FinCEN Form 114). Not all life insurance policies are reported. Rather, only certain life insurance policies are reportable once they have what is referred to as a surrender value. If the foreign insurance policy does not have a surrender or "cash" value, it may not be reportable.

The Surrender Value is the current "cash" value of the life insurance policy. For example, let's say Daniel purchased a life insurance policy for $50,000 and then premiums each year, with the payout (in 30 years) to be $2,000,000. The surrender value is the value that the owner of the policy can "surrender" or turn in the policy to the insurance company, and receive a value in exchange for surrendering the policy and the rights associated with it.

A common question involves whether beneficiaries of foreign life insurance policies must report the policy on their FBAR. The answer is generally no. That is because the beneficiary does not have any ownership interest in the policy and can be removed at any time by the owners.

Frequently asked questions