Life insurance is, for many people, is not only a responsible way to provide for your dependents should the unthinkable happen but also a valuable savings tool in a diversified investment portfolio. Given that taking out a life insurance policy is one of the most fiscally responsible ways someone can spend their money, one would expect Congress to authorize tax incentives that encourage people to insure themselves. There are, in fact, a number of tax benefits that incentivize the purchase of life insurance policies. There’s one caveat however; Congress has only conferred these benefits to qualified (i.e. domestic) life insurance policies (including PPLI).
Not only does the IRS charge you income taxes on the “inside buildup” of your foreign life insurance policies every year, the IRS also charges you an excise tax on the premiums you pay into a foreign life insurance policy. The foreign life insurance policy isn't a life insurance for income tax purposes, thus taxable, but the policy is a life insurance for excise tax purposes!
To facilitate their collection of excise taxes, the IRS created Form 720, its Quarterly Federal Excise Tax Return. The excise tax form needs to be completed and filed four times throughout the year. Line 30 of Form 720 requires taxpayers to pay $.01 for every dollar paid as a foreign life insurance premium. For most taxpayers, this means that the actual amount of tax owed each quarter is relatively small, so the filing requirements end up creating a greater hardship than the liability itself.
If you’re thinking to yourself that filing a quarterly report and paying a small sum to the IRS four times a year doesn’t seem terribly onerous, well there’s one more hurdle the IRS expects you to clear in order to be a compliant owner of foreign life insurance. The IRS, in all its wisdom and benevolence, decided to pigeonhole the tax on foreign life insurance premiums onto Form 720 – a form primarily aimed at businesses.
You need an Employer Identification Number: That's how stupid
A consequence of this careless tax administration is that the thousands of US tax subjects that own foreign life insurance are required to file for an Employer Identification Number in order to complete Form 720. While standard practice at the IRS is to allow taxpayers to use their Social Security Number, Individual Taxpayer Identification Number, or Employer Identification Number, whichever is most appropriate. Not so on Form 720.
With the exception of one-time filers (unlikely for those paying insurance premiums year after year), all taxpayers filing Form 720 must have an EIN. As part of the process for filing for an EIN, you will have to affirm that you are a Sole Proprietor, or an individual who is in business for him or herself, meaning that in the eyes of the IRS, you are now an employer.
If you are concerned because you have not been reporting any foreign life insurance policies you have, contact us at 888-727-8796 or email firstname.lastname@example.org.