Is the cash value of life insurance taxable?

Cash Value of Life Insurance Taxable?

Here are answers and opinions from FAQ Farmers:

• It depends on the type of "cash out" you applied for and which state you live in. You should be able to obtain some form of written verification regardless, so contact your life company.

• (1) If you surrender (cash-in) a life insurance policy and the total cash value amount returned to you is less than the total amount of premiums paid, the cash value is not taxable. (2) If the cash value returned to you is greater than the total amount of premiums paid, the amount in excess of premiums paid is considered a "gain" and is taxable. (3) If the policy you surrender (cash-in) is considered a Modified Endowment (your company can inform you whether it is or not), cashing-in or borrowing against the cash value may be fully taxable. (Consult a tax advisor if this is the case).

• Be cautious of plans to take loans from your life insurance to avoid taxation. These loans are still taxable beyond what you paid in if your policy ever disappears while you are alive. For this reason, it is critical to carefully review your plan each year, particularly if you plan to take loans or have loans against your policy.
  

First answer by Michelle. Last edit by Aaron p. Contributor trust: 33 [recommend contributor]. Question popularity: 310 [recommend question]