Is cash surrender $ for insurance policy taxable?

Answer 1

Only on the gain. The gain is the difference between the amount of premiums you paid into the policy and the value of the cash value. For example, if you paid a total of $10,000 of premiums and the value of the cash value is only $11,000, then you will owe income tax on the $1000.

If you have taken any loan out of the policy and you surrender the policy, you will owe taxes on the loan.

Answer 2

mbrcatz17 is partly right. I've done this for 34 years, and teach CE courses as well as test preps. She's correct that the Cash Surrender Value is taxable only to the extent that you have a gain, i.e., your total premiums for 10 years was $8,000, and your Cash Surrender Value is $8,500, then the $500 is taxable as ordinary gain.

I have seen policies where this happens, but it does not happen often in the smaller, more family / consumer -oriented policies. And in today's low interest rate environment, you'll see even less.

An alternative to cashing in your policy would be to make a loan against the cash value. The loan, even if it exceeds your basis (premiums paid), is not taxable. There is an interest charge for the loan - likely 6% to 8%, but it is simple interest, not compound. In addition, rather than repay the entire amount, you can just pay interest only for as long as you wish. If you don't pay the interest, it will continue to eat away at your remaining cash values, and might cause your policy to terminate after a period of time.

The amount of the loan will be deducted from your face amount (benefit amount) if you die, ie., you make a $10,000 loan against a $500,000 policy, then die, so your beneficiary gets $490,000 (the $500K less the $10K loan).

Interest you pay on the loan is tax-deductible, and you can continue to pay your regular premiums (plus the interest), and your policy will remain in force, less the unrepaid amount of the loan.

Hope that helps!
-VFAH, CLU

Answer 3

You ONLY pay taxes on the gain. That means, Add up all the money you've paid into the policy, all the years you've paid. Subtract the "cash surrender value". If you have a negative number, ie, if the cash surrender value is MORE than ALL the years you've paid into it, all together, you have a gain, and you pay tax on that difference.

I've NEVER EVER EVER seen a policy where the cash surrender was more than the premiums, and I've never heard of it, either.

Answer 4

I'm no tax expert, but you're just getting your own money back like taking it out of the bank.