3823. How is the amount of taxable income determined when life insurance protection is purchased under a contributory plan?polearyrcline202005-04-08T18:45:00Z2014-08-17T19:30:00Z2014-08-17T19:30:00Z11951114Hewlett-Packard Company921307142007-10-05T00:00:00ZTaxFactsDefaultArticleSite Map/Life Insurance/Income Taxation/Proceeds/Living/Disposition/Sale or Purchase of a Contract115140262-00-tf1.xml263.00;#2099;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1If the owner of a life insurance or endowment contract sells the contract, such as in a life settlement, what are the income tax consequences to the seller?74200.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:41:49Z3823. How is the amount of taxable income determined when life insurance protection is purchased under a contributory plan?Life insurance protection purchased under a contributory plan is considered to have been paid first from employer contributions and trust earnings, unless the plan provides otherwise. Thus, the P.S. 58 (currently Table 2001) costs are taxed to the employee unless the plan provides that employee contributions are to be applied to the insurance cost.Rev. Rul. 68-390, 1968-2 CB 175.If amounts attributable to deductible employee contributions, including net earnings allocable to them, are used to purchase life insurance, the amount used, not the P.S. 58 (currently Table 2001) cost, is included in the employee’s gross income.IRC Sec. 72(o)(3). It is unclear whether such amounts are subject to a premature distribution penalty; the IRS has specifically exempted P.S. 58 (currently Table 2001) costs of life insurance protection included in income from such a penalty (Q 3837). Although the deduction for any contribution used to purchase life insurance is not disallowed, it is, in effect, offset. Loans under the policy would be considered a distribution, including automatic premium loans on default of payment of a premium.