The ULIP vs. IRS Debate: Is Your Indian Life Insurance a Tax Time Bomb?
If you have an LIC, HDFC Life, or ICICI Prudential ULIP (Unit Linked Insurance Plan), you likely view it as a safety net for your family. However, once you become a U.S. tax resident, the IRS views that same policy through a very different lens.
At KKCA, one of the most frequent “emergency” inquiries we handled in 2025 involved Indian ULIPs that had been ignored for years. Here is the reality of how these policies are taxed in the U.S. for the 2025 tax year.
1. The Insurance Myth
In India, a ULIP is a life insurance product. In the U.S., for a policy to be treated as “Life Insurance,” it must meet strict Cash Value Accumulation Tests under Section 7702. Most Indian ULIPs fail these tests because the investment component is too high relative to the death benefit.
The Result: The IRS “looks through” the insurance wrapper and sees a Passive Foreign Investment Company (PFIC).
2. Double Trouble: PFIC Reporting (Form 8621)
Because the “units” in your ULIP are invested in Indian mutual funds or stocks, each ULIP is essentially a basket of PFICs.
- Reporting Requirement: You must file Form 8621 every year for each ULIP if it meets the value thresholds.
- Taxation: Like Indian mutual funds, any “excess distribution” or gain upon surrender is taxed at the highest marginal rate (up to 37%) plus compounded interest.
3. The Forgotten 1% Excise Tax (Form 720)
This is the “stealth” tax that almost everyone misses. Under Section 4371, the IRS imposes a 1% Excise Tax on premiums paid to foreign life insurance companies.
- Who pays it? You do.
- How? By filing Form 720 quarterly (or annually in some cases).
- Penalty: Failure to pay excise tax can lead to additional penalties and interest, even if the amount of tax is small.
4. FBAR and FATCA (Form 8938)
Since a ULIP has a “Cash Surrender Value,” it must be reported on:
- FBAR (FinCEN 114): If all foreign accounts exceed $10,000.
- Form 8938: If you meet the 2025 thresholds (e.g., $200,000 for single expats).
The “Foreign Trust” Complication
In complex cases, if the ULIP is held within an Indian private trust or has specific employer-contribution features, the IRS might even classify it as a Foreign Grantor Trust. This triggers Form 3520, which carries a devastating penalty of $10,000 or 35% of the gross value for failure to disclose.
KKCA Alert: If you’ve been reporting your ULIP as “just a bank account” on your FBAR, you are technically out of compliance. The IRS requires the PFIC (Form 8621) and Excise Tax (Form 720) disclosures to be fully compliant.
How KKCA Can Help You “Defuse” Your ULIP
If you realized today that your Indian insurance policies haven’t been reported correctly, the Streamlined Procedures remain your best path forward. We help you:
- Analyze your policy: Determine if it’s a PFIC, a Foreign Trust, or a standard investment.
- Calculate the 1% Excise Tax: Catch up on missed Form 720 filings.
- Make Protective Elections: Use the Mark-to-Market (MTM) election where applicable to stop the 37% tax rate from growing.
Looking for personalized tax services about your specific tax situation, please contact us. We are here to help you with your specific tax matters.
Disclaimer
This blog is intended for informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA or tax attorney for guidance specific to your situation.