Depends on what type of cash value life insurance you’re addressing. If the contact is Indexed, Variable or Current Assumption Universal Life Insurance, any amount over the original contributions (basis) will be treated as profit (gain) and taxable at ordinary income tax rates. Participating Whole Life Insurance is similar, but it’s important to note the to the extent that dividends, which are a return of unused premium, are treated as your original contributions (basis), any amount greater than that would be treated as profit (gain) and taxable at ordinary income tax rates.
Always request a policy in force ledger and the last annual statement, and then in turn, have an insurance and tax expert review it before surrendering a cash value policy. Keep in mind that surrendering the policy will terminate the death benefit coverage.
Co-Founder, Coastal Financial Partners Group, California
Maybe. It depends on how much you've paid in which is your cost basis in the contract (total premiums less withdrawals, if any). You also need the cash surrender value. Your annual statements will show these numbers as of the anniversary date of the policy. A call to the insurance company would give you an updated amount as of now.
You would have income tax liability on the gain (cash surrender value less basis).
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Is cashing out Life Insurance values taxable? It can be depending on what type of policy you have, it can also provide you with how much of the gain is considered taxable. Keep in mind your premiums paid in have in most cases already been taxed. If you are dealing with a mutual company that pays dividends, the portion of the values that are dividends will not be taxed. You are left with the gains on the policy. IF you are considering cashing out, contact your company and ask them to prepare a statement prior to so you can see and plan accordingly.
Cashing out a cash value life insurance policy in almost all cases will have proceeds subject to ordinary income taxes. The good news is most life insurance premiums have been paid with after tax dollars so, therefore only the proceeds or gains are subject to tax. You may also borrow from your cash value if you need money and those funds are income tax free. I suggest sitting down with your life insurance agent and discussing all of your options to avoid making a costly mistake.
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Always request a policy in force ledger and the last annual statement, and then in turn, have an insurance and tax expert review it before surrendering a cash value policy. Keep in mind that surrendering the policy will terminate the death benefit coverage.
You would have income tax liability on the gain (cash surrender value less basis).