Receiving payments from Insurance Co

[LindaB]

Taxpayer has been receiving $100 a month from a life insurance company since 1986 when her father died. There has never been a 1099-R or 1099-Misc issued, and she had never reported any income from this. She doesn't know what these payments are for, just that her father did something because he wanted her to have this money. I assume it was either a commercial annuity or a life insurance policy. I asked her to get more information from the company, they sent a letter with this information (figures rounded off):

Type of Contract--Fixed Amount

First Payment Date--May 6, 1996

Payment Mode--Monthly

Amount of Monthly Payment--$100

Initial Premium--$15,000

Total Paid--$16,400

Current Value as of 12-28-09--$4,600

The original insurance company was Provident Mutual and was bought out or somehow changed to Nationwide in 1996 (payments started in 1986). I called Nationwide and this is all the information they have. They don't have the original contract but might be able to get it. They thought it was probably from a life insurance policy. They never issued a 1099 because the original company never issued one. I assume that when the payments started in 1986 the taxpayer was given information necessary to use the General Rule to figure the taxable part of each payment, but that was never done.

I would greatly appreciate any ideas on what to do with this!

[Lion EA]

Does she get a 1099-INT? If so, could the monthly payments be the life insurance proceeds paid over time instead of in one lump sum when her father died? Then, she'd have earned interest and receive a Form 1099-INT on those earnings but the principal payments wouldn't generate any form, right?

[kcjenkins]

Sure sounds like a commercial annuity. Has a rather small 'interest' component, but certainly some portion is, and has been taxable. However, based on the numbers shown, it might not have been enough each year to actually have changed your client's tax bill enough to worry about amending past years.

[LindaB]

Does she get a 1099-INT? If so, could the monthly payments be the life insurance proceeds paid over time instead of in one lump sum when her father died? Then, she'd have earned interest and receive a Form 1099-INT on those earnings but the principal payments wouldn't generate any form, right?

I just got additional information from her, she found the original policy, it was life insurance taken out in 1938. I agree with you that in the case of life insurance paid over time, the amount she receives over the principal amount would be reported as interest income, but she has never received a 1099-INT. Is it possible that in 1986 the rules were different, and life insurance proceeds paid over time were not taxable? Since she has never reported any interest income from this, any suggestions on how I should handle it?

Thanks