Foreign life insurance that complies with the definition of life insurance through U.S. law falls under the same general tax treatment as one issued by a U.S. insurance company.
As the cash value of a life insurance policy builds, it is tax deferred until the policy is surrendered. Once it is surrendered, any excess of the total premiums paid would be subject to the same taxation of standard income.
An excise tax must also be paid on the premiums paid to the foreign insurance company which can range from 1% to 4%, depending on the type of foreign life insurance policy obtained.
Other factors, such as a treaty with Switzerland, may affect how much, if any, additional taxes are required.
Foreign annuities and foreign pensions are payments distributed through a pension or retirement policy granted by a foreign source. They are subject to the same obligations as U.S. pension taxes. Here are example sources:
- Foreign employer
- Foreign insurance agency
- Foreign trust
- Foreign government
Many expatriates seek overseas employment to enjoy a higher standard of living by taking advantage of tax incentives, such as Section 911 exclusions which covers both foreign earned income and housing allowance exclusions.
FBAR filings on foreign life insurance
According to the Internal Revenue Service (IRS), a financial account includes “savings, demand, checking, deposit, time deposit, or any other account maintained with a financial institution or Other Person engaged in the business of a financial institution.”
Under these guidelines any foreign life insurance policy with cash surrender value is treated a a financial account and must be filed on a FBAR.
The exception to this are foreign insurance polices that are acquired through an insurance agent located within the U.S.
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