Q: What are the rules regarding taxation of the death benefit for 403(b) policies? We are being told there is a portion of the death benefit that is taxable, despite the fact that PS-58 costs have been paid since inception. We were given a "taxable event" death benefit number by the insurance company, but have yet to receive an explanation on how they arrived at this number.
A: The PS-58 costs are contributed on an after-tax basis; they thus form a cost basis in the contract. The balance of the death benefit (after subtracting the PS-58 costs charged each year) is taxable. To determine the taxable death benefit, you would need to calculate the PS-58 costs and subtract them from the total death benefit. IRS Publication 571 offers a table designed to help with those calculations.