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?


Liked this question? Tell your friends about it

2 Answers

Order by
Oldest to Newest
Newest to Oldest

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 


Related Questions

Other people asked questions on similar topics, check out the answers they received:

Asked: What happens when a life insurance policy has no ...

what happens when a life insurance policy has no beneficiary and you die

Asked: What is the full name of CMFG LIFE INSURANCE

What is the full name of CMFG LIFE INSURANCE

Asked: What is the oldest life insurance company

what is the oldest life insurance company

More Questions

I am searching for reputable companies who sell final expense life

There are several good insurance companies that offer final expense insurance including Lincoln Heritage, Foresters, Guardian Insurance, Securus Final Expense, American Income Life, AFBA, Columbian Financial Group, and StateFarm. In addition, several insurers offer senior no exam life insurance ...

IRS back taxes and accidental life insurance payout

Rufus - Typically the IRS cannot directly garnish a life insurance payout. However, if they have notified you of a bank levy, they might be able to take the money once you deposit it to your bank account. My advice is to just use the payout to pay off the taxes you owe. The IRS won't go away unless ...

My mother past away in January of this year and I had an old policy from

If your speaking of AAA, you can reach their customer service at 1-800-684-4222. Hope this helps.

My sister had a life insurance policy and she ...

I'm not sure what the question is, it's just the intro to a scenario, but if you lost the policies call the funeral home to check their records for policy info if they dealt directly with the insurance company or call the insurance company (provided you know the name of the company) with your sister ...