From Universal Life to Whole Life

We recently converted our universal whole life policies (which we had for 35 years) to whole life insurance. However, for the first time ever, we received forms to complete for tax withholding purposes. Apparently, the dividends earned (which we want reinvested in the policies) are taxable? Either our insurance representative is using the incorrect vehicle for our investment, or suddenly life insurance dividends/proceeds are taxable? Is there a way around this? Any input or advice you can give on this (very confusing) issue would be greatly appreciated. Thank you.

Terry Says:  OK, insurance is confusing — and you are confused!  First, there is no such thing as “universal whole life”.     So you probably,  I’m guessing, converted some form of Universal life (which allowed you to adjust he premium payments,, and possibly the investments inside the policy) into a traditional whole life policy.

If there was any “cash value” in the original policy (which is likely), then your agent should have done a 1035 Exchange — which in layman’s terms is sort of like an IRA rollover . Done properly, there is no tax owed.  Ask your insurance agent whether that was done.  If not, he certainly may have some liability — and you will have to pursue that with his bosses!

If you have a new whole life policy, the dividends are not taxable (in almost every circumstance) so do not worry about paying future taxes on any dividends that are declared and left inside the policy.