Can a life insurance company be held liable if they didn’t withhold state/local taxes after being instructed to do so?

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Can a life insurance company be held liable if they didn’t withhold state/local taxes after being instructed to do so?

I cashed in 2 whole life insurance policies on my uncle. I was the beneficiary and owner of the policies. On their surrender form I clearly checked the box instructing them to withdraw taxes. When I received my checks, I called them and they told me that was because no taxes were due. I now received a 1099R which says that I owe almost $15,500 in taxes. When I called them they said they made a mistake. Isn’t this against federal law?

Asked on February 6, 2011 under Insurance Law, Connecticut

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

If you are only paying the taxes that you have to pay anyway, there is no damage and no liability; e.g. if you owe $15.5k in taxes, it's the same whether it was withheld up front or you have to pay at the back end. As long as you are only paying the correct total amount, there is no harm and no liability. On the other hand, if due to the company not following your instructions, you have incurred additional, unnecessary costs or expenses, such as late penaltis, fines, interest charges, etc.--or possibly even had to hire a lawyer or accountant to deal with the IRS, which you would otherwise not have needed--you may have a claim or cause of action against the insurer for those costs which they negligence has caused you to incur.


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