Reporting Foreign Life Insurance – FATCA & PFIC | List of Forms to File
Reporting Foreign Life Insurance: When it comes to Reporting a Foreign Life Insurance Policy to the IRS, it can be much more complicated than you may have firs thought. The IRS considers Foreign Life Insurance a “Reportable Financial Account.” That means the Policy must be disclosed on many different international information reporting forms, such as Form 8621 (PFIC) and/or Form 8938 (FATCA).
If the Foreign Life Insurance is not properly (and timely) reported — it may lead to offshore fines and penalties, although the penalties may be abated with Voluntary Disclosure or Reasonable Cause.
Is Foreign Life Insurance PFIC or FATCA reportable
If you own a foreign life insurance policy, you may have a Reporting Foreign Life Insurance Policy requirement beyond FinCEN Form 114. These additional IRS requirements may include FATCA Form 8938, PFIC Form 8621, and Foreign Trust Form 3520-A.
Let’s take a look:
FATCA Form 8938
Form 8938 refers to FATCA.
FATCA refers to the Foreign Account Tax Compliance Act. We have written numerous articles on FATCA, but at the end of the day it is basically this:
If you have a foreign financial asset that qualifies as a “specified” foreign financial asset and you meet the threshold for filing, then you must include the policy on FATCA Form 8938 in addition to FInCEN Form 114.
The Foreign Life Insurance Policy will be reported using the cash or surrender value for each year you are required to report it on form 8938.
In addition you also have to include any type of income that may have been generated from the life insurance policy come along with the source of the income.
There are different 8938 threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.
Common types of foreign life insurance policy income:
- Interest income
- Dividend income
- Capital gains
Resource: Form 8938 Guide
More than Just FATCA & 8938
Different foreign life insurance policies may have more complex reporting requirements as well. Especially, if it is a Unit Linked Life Insurance Policy.
Without getting too technical, if it is a linked policy, then there is an investment component to it beyond mere life insurance – and that leads us to the next section which is form 8621.
PFIC Form 8621
Form 8621 is used to report passive foreign investment companies (PFIC). A PFIC can be incredibly complicated, and beyond the scope of this introductory article.
When it involves foreign life insurance, it is most common with Unit Linked Life Insurance.
Unit Linked Foreign Life Insurance
Unit Linked Insurance Plans combine the investment component, with the life insurance component. As with most insurance policies, the “pay-in” is via premiums.
But, unlike pure insurance policies — there is a second “investment component” as well, which is then commingled with the investment, to provide an investment component along with the life insurance coverage.
Common Examples of Unit Linked Insurance Plans
Some common examples, include:
Friends Life (aka Aviva)
Personal Pension in the UK or UK Offshore, such as Guernsey.
It generally will contain funds and shares, so at the end of the day, this may be considered a PFIC.
These are common life insurance policies, but they are not necessarily linked to an investment per se. There many flavors (linked and non-liked) and while some tend to take the shape more of “Life insurance” with some accrued interest — others are more investment focused linked insurance policies.
India LIC or Prudential
These may or may not have an investment component to it. They can vary greatly depending on the type of policy.
When a U.S. Person is invested in these types of policies, and subject to U.S. Tax, they are referred to as “Expat Life Insurance.”
PFIC & Foreign Life Insurance
Form 8621 is an IRS Form used by Taxpayers to report Foreign Investments — more specifically Passive Foreign Investment Companies. Foreign Life Insurance may be reported as a Passive Foreign Investment Company on Form 8621. This is especially true, if your policy is Unit linked.
The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.
Resource: Form 8621 Guide
Examples of Expat Life Insurance Policies
There are many different types of policies, but some of the more common policies for U.S. Person Expats.
- Friends Life
Some of the more common countries in which U.S. Person expats purchase overseas life insurance, include:
- The United Kingdom
- Hong Kong
Foreign Trust Form 3520-A
Form 3520-A is how U.S. Taxpayers report foreign trusts, Foreign Life Insurance may be reported as a Foreign Trust on Form 3520-A, but generally your foreign life insurance policy is not a foreign trust (but is not common)
A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore.
Resource: Form 3520-A Reporting
Reporting Foreign Life Insurance on FinCEN 114 (Foreign Account aka FBAR)
Foreign Life Insurance FInCEN 114: The FinCEN Form 114 is the Foreign Bank and Financial Account Form. It is used to report foreign bank and financial accounts. Foreign Life Insurance Policies are considered “accounts” for this purpose. Therefore, your Foreign Life Insurance may have to be reported on the FinCEN 114 form, if you meet certain threshold requirements for reporting.
*If you are a U.S. Person, it does not matter whether or not you have to actually file a US tax return to determine if you have to file a FinCEN 114. The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FinCEN Form and report all of the accounts.
Foreign Life Insurance Form 720
Foreign Life Insurance may be reported with respect to Excise Tax on Form 720. This is a relatively simpler form, with no monster penalties attached to it.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.