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US tax - life insurance, critical illness insurance

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  1. #1

    Join Date
    Nov 2020

    Question US tax - life insurance, critical illness insurance

    Hi everyone,

    Did you guys (US citizen) buy any life insurance or critical illness insurance in hk? I’m considering buying them from AIA, but not sure if there will be any US tax implication.

    1) Do I have to pay US tax or report to the IRS every year if I buy these kinds of insurance?

    2) Any tax implications on the critical illness insurance payout?

    3) Is there any other things I should consider before buying?

    Thanks a lot!

  2. #2

    Join Date
    Jan 2018
    Taiwan and HK

    Your post made me very curious as I had never considered that there would be tax implications for such things. I did a search and found the below link. Seems it is more if you are using a life insurance policy as an investment vehicle rather than, say, a term life insurance policy...also seems there are different rules on the policy if you are actually living abroad.

    I guess it's something you really need to look into (with the type of policy you may be considering). I think you would be OK for payments you receive for injuries, I think those aren't taxed in the US...

  3. #3

    Join Date
    Aug 2006

    If I recall correctly there is also the possible need to report the policy in the FBAR, even if no tax implication exists. Perhaps depending on whether there is a potential cash payout if you cancel the policy or after the 'term' period when you are still alive. Then it is a foreign overseas account or instrument even if not an investment. Joy.

    Morrison likes this.

  4. #4

    Join Date
    Oct 2006
    Hong Kong

    Man the US government does get you at every turn.

  5. #5

    Join Date
    Feb 2012

    I have term life, critical illness, and accident insurance through my wife's employer at what I consider very reasonable prices. None of the policies have any cash value if surrendered, and only matter if bad things happen to me. I'm not a tax expert, but I'd say payouts from term life, critical illness, or accident insurance policies aren't income and thus aren't taxable. For term life, my wife, not a US citizen, is the sole beneficiary, so if I die that payout won't be taxed. I'm quite sure that term life insurance payouts aren't taxable in the U.S. or HK (they also are separate from someone's estate and can be claimed and paid out much faster than an estate's affairs are settled).

    I'd strongly advise anyone to avoid buying any insurance that has any investment linked component or that has if surrendered cash value. Insure what you think you need to, but buy the simplest insurance that you can find that you can fully understand. Generally, the more complicated a financial instrument is the more expensive it will be, and it will allow a financial institution to make more money on/off your money.