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

UPDATED: Feb 6, 2011

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UPDATED: Feb 6, 2011Fact Checked

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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


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 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.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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