If you cash in a life insurance policy, do you have to pay taxes on it?

If you cash in a life insurance policy,  do you have to pay taxes on it?

 

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Usually yes. It depends on teh country but most often when you cash before the due date taxes apply.

Managing information is a great advantage.

The answer largely depends on how your are "cashing in" the policy and whether or not your policy produced interest payments that have built up the cash value.

Are you Fully or Partially Surrendering the Policy?

Is There Accumulated Interest on top of the Premiums you've Paid?

Cashing in a policy is called surrendering the policy.

The tax rule for most policies is FIFO (first in first out) this means that if you partially surrender, then you can take the premium payments placed in the policy with no tax consequence because you've already paid the taxes on that money.

 Based on this same rule, there may be no taxes on a full surrender unless you've earned interest, in which case you may have capital gains on the interest portion of your surrender only.

A completely different option allows you to keep the policy and take a tax free loan out against it that the insurance company reimburses the interest charges on making it a "zero wash" loan meaning that it cost you nothing.

If you never pay the loan back, then it will be deducted from your tax free death benefit.

But you should always consult the policy itself for the rules and your tax adviser. 

Personal Finance, Insurance 

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