Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona
Video Transcript: Today's question is, Can you cash in a life insurance policy? Well, providing that's it's a cash value policy, you can go ahead and cash it in. Just a heads up, if the cash value is greater that your premiums paid, in other words, greater than your basis, you will have to pay ordinary income tax on the gain, and some of these contracts have surrender charges. If they have surrender charges, you'll not only have to pay ordinary tax on gain, but you'll also have to pay the surrender charge.
Just keep in mind, I like the liquidity. If you can borrow from your policy and keep it in force, it's a better deal. If you have to cash it in, you may want to think about, well I'm just cashing it in to go into another policy, you may want to use a 1035 exchange to bypass the kind of issues like taxable event on ordinary income tax if you have gain in the policy.
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Just keep in mind, I like the liquidity. If you can borrow from your policy and keep it in force, it's a better deal. If you have to cash it in, you may want to think about, well I'm just cashing it in to go into another policy, you may want to use a 1035 exchange to bypass the kind of issues like taxable event on ordinary income tax if you have gain in the policy.