Let’s start with something most people get wrong.
You surrender your life insurance policy, get a check, and assume the entire amount is taxable. It’s not. The IRS only taxes the gain — the difference between what you got back and what you paid in.
But here’s the problem: most people have no idea how much they’ve paid into their policy. They don’t know their cost basis. They can’t calculate the taxable portion. So they either overpay taxes, underpay and face IRS penalties, or avoid surrendering altogether because they’re scared.
This article fixes that. You’ll learn exactly how to calculate the tax on a cash surrender value, step by step, with real examples and IRS guidelines. No jargon. Just the practical stuff you need to know.
Understanding Cash Surrender Value
Before we talk about taxes, you need to understand what you’re actually surrendering.
Most people confuse cash surrender value with the death benefit. Or they think it’s the same as the premiums they’ve paid in. It’s neither.
Let’s break down what cash surrender value actually is, how it’s calculated, and when your policy even has one to begin with.
What Is the Cash Surrender Value?
The cash surrender value is the amount you get if you cancel your life insurance policy before you die.
Notice I said “cancel” — not “claim the death benefit.” That’s the key difference.
The death benefit is what your beneficiaries get when you die. The cash surrender value is what you get if you walk away from the policy while you’re still alive.
These are not the same number. Not even close.
Here’s how insurance companies calculate your cash surrender value:
They start with your policy’s cash value (the savings component that’s been growing inside your policy). Then they subtract surrender charges — fees the insurance company hits you with for leaving early. What’s left is your cash surrender value.
So the formula looks like this: Cash Surrender Value = Cash Value – Surrender Charges
The cash value grows over time from your premium payments, plus interest, dividends (if it’s a participating policy), and investment gains (if it’s a variable policy). But those surrender charges? They eat into that growth, especially in the early years.
That’s why surrendering a policy in year 2 might give you almost nothing, while surrendering in year 20 might give you a decent chunk of cash.
When Does a Policy Gain Cash Value?
Not all life insurance policies build cash value. Only permanent life insurance does.
That includes:
- Whole life insurance
- Universal life insurance
- Variable life insurance
- Indexed universal life insurance
Term life insurance? No cash value. You pay premiums, you get coverage, and when the term ends, you get nothing back. It’s pure protection.
So how long does it take for cash value to build up?
Depends on the policy type. But here’s the general timeline:
With whole life, you might see some cash value after 2-3 years. But it grows slowly at first because the insurance company front-loads fees and commissions.
With universal life, cash value can accumulate faster because you have more flexibility in premium payments and the policy is typically cheaper.
With variable life, your cash value depends on how your investments perform. Good market? Faster growth. Bad market? Your cash value could actually go down.
The big misconception?
People think “cash value” equals “great investment returns.” It doesn’t. The cash value in a life insurance policy grows slower than most investments because you’re paying for insurance coverage, administrative fees, and commissions. It’s a savings vehicle with a death benefit attached — not a high-performing investment account.
If you want pure investment returns, buy term life insurance and invest the difference elsewhere. If you want guaranteed cash value growth plus a death benefit, permanent life insurance makes sense.
But don’t confuse the two.
The Tax Basics of Life Insurance
Life insurance gets special treatment from the IRS. Most of the time, it’s tax-free. But not always.
Understanding when taxes kick in — and when they don’t — is the difference between a pleasant surprise and an expensive mistake. Let’s clear up the confusion.
Why Life Insurance Is Usually Tax-Free
Here’s the general rule: death benefits are not taxable income.
Your beneficiary gets the full death benefit. No income tax. No capital gains tax. The IRS doesn’t touch it.
This is why life insurance is such a powerful financial tool. Your family gets the money they need without the government taking a cut.
But that tax-free treatment only applies to the death benefit. It does not apply when you access the cash value while you’re alive.
That’s where things get complicated.
If you surrender your policy, take a withdrawal, or let it lapse with outstanding loans, the IRS might come calling. Because now you’re not passing money to a beneficiary — you’re taking money for yourself.
And the IRS treats that very differently.
When Taxes Come Into Play
Taxes on life insurance happen in four situations:
1. Surrendering the policy: You cancel the policy and take the cash surrender value. If you’ve made a gain (more on that in a second), you owe taxes on that gain.
2. Taking withdrawals: You pull cash out of your policy without surrendering it. Withdrawals up to your cost basis are tax-free. Anything above that? Taxable.
3. Policy loans that aren’t repaid: You borrow against your cash value and never pay it back. If the policy lapses or you surrender it with an outstanding loan, the unpaid loan amount can become taxable income.
4. Policy lapse with a loan balance: This is the sneaky one. Your policy lapses because you stopped paying premiums. If there’s an outstanding loan, the IRS treats the loan as income. You get a 1099 and owe taxes — even though you didn’t receive any cash.
So what exactly gets taxed?
The gain.
Not the total cash surrender value. Not the premiums you paid. Just the gain — the amount you received that’s more than what you put in.
Here’s the formula: Taxable Gain = Cash Surrender Value – Cost Basis
Your cost basis is the total premiums you’ve paid into the policy (minus any withdrawals or dividends you already received tax-free).
If your cash surrender value is higher than your cost basis, you pay taxes on the difference. If it’s lower, you don’t owe anything.
Simple concept. But calculating it? That’s where most people mess up.
Step-by-Step: How to Calculate Tax on Cash Surrender Value
Alright. Time to get practical.
You’re surrendering your policy. You want to know what you owe in taxes. Here’s exactly how to figure it out — no guesswork, no confusion.
Step 1: Find Your Policy’s Cash Surrender Value
First, you need to know how much you’re actually getting.
Call your insurance company or check your most recent policy statement. Ask for the cash surrender value — not the cash value, not the death benefit. The surrender value.
This is the amount you’ll receive if you cancel the policy today, after the insurance company deducts surrender charges.
Important: If you have an outstanding policy loan, the insurance company will subtract that from your cash surrender value before cutting you a check. Make sure you know the net amount you’re receiving.
Example: Your cash value is $50,000. You have a $10,000 loan and $2,000 in surrender charges. Your cash surrender value is $38,000.
That’s the number you’ll use for tax calculations.
Step 2: Add Up All Premiums Paid
Now you need to figure out your cost basis — the total amount you’ve paid into the policy over the years.
Here’s what counts:
- Your initial premium payments
- Any additional premium payments or top-ups
- Premiums for riders (like term riders or disability waivers)
Here’s what doesn’t count:
- Interest you paid on policy loans (that’s not a premium)
- Loan repayments (you’re just paying back money you borrowed)
- Dividends you already received tax-free
Most insurance companies will include your total premiums paid on your policy statement. If not, call them. They have this information.
Example: You’ve paid $30,000 in premiums over 15 years.
That’s your cost basis.
Step 3: Subtract Premiums Paid from Cash Value
Here’s the formula:
Taxable Gain = Cash Surrender Value – Total Premiums Paid
Let’s use our example:
- Cash surrender value: $38,000
- Total premiums paid: $30,000
- Taxable gain: $8,000
You owe taxes on the $8,000 gain. Not the full $38,000.
What if the result is zero or negative?
Then you owe nothing. No taxable gain means no tax.
Example: You paid $40,000 in premiums but only received $38,000 in cash surrender value. Your result is -$2,000. You took a loss, not a gain. The IRS doesn’t tax losses on life insurance surrenders (and unfortunately, you can’t deduct them either).
Step 4: Report the Taxable Amount Correctly
After you surrender your policy, your insurance company will send you IRS Form 1099-R.
This form shows:
- The gross distribution (your cash surrender value)
- The taxable amount (your gain)
- Any taxes they withheld automatically
You’ll use this form to report the surrender on your tax return.
Where does it go? On Form 1040, Line 5a and 5b (for pensions and annuities). Yes, surrendered life insurance is reported in the same section as retirement account distributions.
What if the insurance company withheld taxes automatically?
Some insurers withhold 10% for federal taxes when you surrender. If they did, that withholding will show up on your 1099-R. You’ll get credit for it when you file your taxes — just like wage withholding from a paycheck.
If they withheld too much, you’ll get a refund. If they didn’t withhold enough (or at all), you’ll owe the difference when you file.
4.5 Step 5: Check for Additional Income (Interest, Dividends)
Here’s a detail most people miss.
If your policy earned interest on the cash value (common with universal life policies), that interest is taxable as ordinary income — separately from the surrender gain.
Your insurance company should report this on Form 1099-INT, not the 1099-R.
Same goes for dividends you received from a participating whole life policy. If you took dividends in cash over the years, those reduce your cost basis. If you left them to accumulate with interest, the interest portion is taxable.
Bottom line: Don’t ignore the 1099-INT if you receive one. That’s additional taxable income beyond your surrender gain.
Example Calculation (with Context)
Let’s walk through a real example so you can see exactly how this works.
Meet Sarah.
Sarah bought a whole life insurance policy 20 years ago. She’s been paying premiums faithfully, but now she needs cash for a business opportunity and decides to surrender the policy.
Here’s her situation:
- Cash value: $60,000
- Surrender charges: $3,000
- Outstanding policy loan: $0
- Total premiums paid over 20 years: $45,000
Step 1: Find the cash surrender value
Sarah’s cash value is $60,000. The insurance company charges a $3,000 surrender fee.
Cash surrender value = $60,000 – $3,000 = $57,000
That’s what Sarah receives.
Step 2: Calculate the cost basis
Sarah paid $45,000 in premiums over 20 years. She never took any withdrawals or dividends.
Her cost basis = $45,000
Step 3: Calculate the taxable gain
Taxable gain = Cash surrender value – Cost basis Taxable gain = $57,000 – $45,000 = $12,000
Sarah owes taxes on $12,000, not the full $57,000.
Step 4: Determine the tax owed
The $12,000 gain is taxed as ordinary income. Sarah’s in the 24% federal tax bracket.
Federal tax = $12,000 × 24% = $2,880
(Plus any state income tax, depending on where she lives.)
Sarah walks away with $57,000, owes roughly $2,880 in federal taxes, and nets about $54,120 after taxes.
Now let’s change the scenario.
What if Sarah had a $10,000 outstanding policy loan she never repaid?
Here’s how the numbers shift:
Step 1: Adjust for the loan
Cash value: $60,000 Surrender charges: $3,000 Outstanding loan: $10,000
Cash surrender value = $60,000 – $3,000 – $10,000 = $47,000
Sarah only receives $47,000 because the insurance company deducts the loan.
Step 2: Cost basis stays the same
Her cost basis is still $45,000 (loans don’t change what you paid in premiums).
Step 3: Calculate the new taxable gain
But here’s the tricky part: the IRS treats the unpaid loan as part of the distribution.
Total taxable distribution = Cash surrender value + Outstanding loan Total taxable distribution = $47,000 + $10,000 = $57,000
Taxable gain = $57,000 – $45,000 = $12,000
Wait — the taxable gain is still $12,000?
Yes. Because even though Sarah only received $47,000 in cash, the IRS considers the $10,000 loan forgiveness as income too. She borrowed that money, never paid it back, and now it’s being written off. The IRS calls that taxable income.
So Sarah receives $47,000 but owes taxes on a $12,000 gain — same as before. The loan didn’t increase her tax bill, but it did reduce the cash she walked away with.
Key takeaway:
Policy loans don’t increase your taxable gain if you surrender the policy — but they do reduce your net proceeds. And if your policy lapses with an outstanding loan, you could owe taxes without receiving any cash at all.
That’s the scenario that catches people off guard.
Special Situations and Exceptions
Most surrenders follow the formula we just covered. But life insurance has loopholes, special rules, and situations where the tax treatment changes.
Here are the big ones you need to know about.
Modified Endowment Contracts (MECs)
A Modified Endowment Contract (MEC) is a life insurance policy that fails the IRS “seven-pay test.”
Translation: you overfunded the policy too quickly in the first seven years, turning it into more of an investment account than a life insurance policy. The IRS doesn’t like that, so they slap it with MEC status — and punish you with worse tax treatment.
How do you know if your policy is a MEC?
Your insurance company will tell you. It’s on your policy documents. If you’re not sure, call and ask.
What changes with a MEC?
With a normal policy, withdrawals come out tax-free up to your cost basis (the premiums you paid). Gains are taxed only after you’ve withdrawn more than you put in.
With a MEC, it’s the opposite. Gains come out first. So the moment you take a withdrawal or loan, you’re taxed on the gain — even if you haven’t touched your original premiums yet.
And it gets worse: if you’re under 59½, you’ll pay an additional 10% early withdrawal penalty on the taxable portion, just like with a 401(k).
Example: You have a MEC with $50,000 in cash value. You paid $40,000 in premiums, so your gain is $10,000. You take a $15,000 withdrawal.
- First $10,000 = taxable gain (ordinary income + 10% penalty if you’re under 59½)
- Next $5,000 = tax-free return of premiums
With a non-MEC policy, that entire $15,000 would have been tax-free because it’s under your $40,000 cost basis.
Bottom line: MECs kill the tax advantages of life insurance. Avoid them unless you know exactly what you’re doing.
Employer-Owned or Business Policies
Sometimes life insurance policies aren’t owned by individuals — they’re owned by businesses.
Common scenarios:
- Key person insurance (the company insures an essential employee)
- Buy-sell agreements (partners insure each other to fund buyouts)
- Split-dollar arrangements (employer and employee share premium payments and benefits)
When a business surrenders a policy it owns, the tax rules are basically the same: taxable gain = cash surrender value minus premiums paid.
But here’s the difference: the gain is reported as business income, not personal income. It goes on the company’s tax return, not the individual’s.
And if the policy was part of a split-dollar arrangement where the employee had some rights to the cash value, things get messy fast. The IRS has specific rules about who owes what, and you’ll want a tax professional to sort it out.
One more wrinkle: If you personally own a policy and later transfer it to your business (or vice versa), that transfer can trigger tax consequences. Don’t assume you can just move policies around without IRS involvement.
Partial Withdrawals or Policy Loans
You don’t have to surrender the entire policy to access cash. You can take partial withdrawals or borrow against the cash value.
Partial withdrawals
With a non-MEC policy, withdrawals up to your cost basis are tax-free. Anything above that is taxable as ordinary income.
Example: You’ve paid $30,000 in premiums. You withdraw $20,000. That’s tax-free. You withdraw another $15,000. The first $10,000 is tax-free (completing your $30,000 cost basis), and the remaining $5,000 is taxable.
Partial withdrawals reduce your cash value and death benefit, but they don’t cancel the policy. You can keep it in force.
Policy loans
Loans are generally not taxable — as long as the policy stays in force.
You borrow against your cash value. The insurance company charges interest (usually 5-8%). But there’s no tax bill because technically you haven’t “received” income — you’ve just borrowed money you’ll eventually pay back (or the insurance company will deduct it from the death benefit).
The danger? If you stop paying premiums and the policy lapses with an outstanding loan, the IRS treats the unpaid loan as a distribution. Now you owe taxes on the gain — even though you didn’t receive any new cash.
This is called a “phantom income” situation, and it catches people off guard.
Example: You borrowed $40,000 against your policy. You paid $35,000 in premiums over the years. The policy lapses because you stopped paying premiums. The IRS says you received a $40,000 distribution. Your gain is $5,000 ($40,000 – $35,000). You owe taxes on $5,000 — even though you didn’t get any money when the policy lapsed.
Brutal, but that’s the rule.
Policy Surrender After Death or Terminal Illness
What if you surrender a policy because you’re terminally ill? Or what if your beneficiary surrenders it after your death?
Accelerated death benefits (terminal illness)
If you’re diagnosed with a terminal illness (typically defined as life expectancy of 24 months or less), you can access part of your death benefit early through an accelerated death benefit rider.
Good news: these payments are generally tax-free under IRS rules, as long as you meet the terminal illness criteria. They’re treated like death benefits, not surrenders.
Some policies also let you accelerate benefits for chronic illness or long-term care needs. Those may also qualify for tax-free treatment, but the rules are stricter. Check with your insurer and a tax pro.
Surrender after the insured’s death
Once the insured person dies, the policy pays out the death benefit — and that’s tax-free to the beneficiary.
But what if the beneficiary decides to surrender the policy instead of taking the death benefit? (This is rare, but it happens with certain policy structures.)
In that case, the beneficiary doesn’t owe income tax on the surrender proceeds because they’re still receiving what’s essentially a death benefit. But if the policy has grown significantly and the estate is large enough, it could be subject to estate tax — a completely different animal.
Bottom line: if someone dies, take the death benefit. Don’t surrender the policy unless there’s a very specific reason to do so.
IRS Rules and Official References
The IRS doesn’t make tax rules easy to find. But if you want the official word on how life insurance surrenders are taxed, here’s where to look.
These are the three resources that matter most.
IRS Publication 525: Taxable and Nontaxable Income
This is the big one. Publication 525 covers when income is taxable and when it’s not — including a whole section on life insurance.
What it clarifies:
- When death benefits are tax-free (almost always)
- When cash surrender values are taxable (when there’s a gain)
- How to calculate your cost basis (premiums paid minus certain adjustments)
- Special rules for MECs, policy loans, and employer-owned policies
It’s not light reading. But if you want the official IRS explanation for why you owe taxes on a surrender, this is it.
You can download it for free at IRS.gov. Search “Publication 525” and grab the most recent version.
Form 1099-R Instructions
After you surrender your policy, your insurance company sends you Form 1099-R. This form reports the distribution to you and the IRS.
The instructions for Form 1099-R explain:
- What each box on the form means
- How to interpret the “taxable amount” and “distribution code”
- What to do if your insurer didn’t calculate the taxable portion correctly (yes, this happens)
Box 1 shows the gross distribution (your cash surrender value). Box 2a shows the taxable amount (your gain). If Box 2a is blank, it means the insurer doesn’t know your cost basis — and you’ll need to calculate it yourself.
The instructions also cover distribution codes. For life insurance surrenders, you’ll usually see Code 7 (normal distribution) or Code 1 (early distribution, if it’s a MEC and you’re under 59½).
Download the instructions at IRS.gov by searching “Form 1099-R Instructions.”
IRS Interactive Tax Assistant: Life Insurance Proceeds
This is the most user-friendly tool the IRS offers.
The Interactive Tax Assistant (ITA) is a free online tool that asks you simple questions and tells you whether your life insurance proceeds are taxable.
You answer questions like:
- Did you surrender the policy or receive a death benefit?
- Was it a Modified Endowment Contract?
- Did you take a loan or withdrawal?
Based on your answers, the ITA gives you a clear yes-or-no answer on taxability — plus links to the relevant IRS publications.
It’s not perfect, but it’s a good starting point if you’re confused.
Find it at IRS.gov by searching “Interactive Tax Assistant” and then selecting “Are Life Insurance Proceeds Taxable?”
One more thing:
If your situation is complicated — you have a MEC, an outstanding loan, a business-owned policy, or you’re just not sure — don’t guess. Talk to a CPA or enrolled agent who specializes in life insurance taxation.
The IRS publications give you the rules. A tax professional helps you apply them correctly.
Common Mistakes to Avoid
Most people who mess up life insurance taxes make the same handful of mistakes.
Here are the big ones — and how to avoid them.
Mistake #1: Forgetting to subtract all premiums paid
Some people calculate their tax based on the full cash surrender value. Wrong.
You only owe taxes on the gain — the amount you received that’s more than what you paid in.
If you paid $50,000 in premiums and received $55,000 in cash surrender value, you owe taxes on $5,000. Not $55,000.
But here’s where it gets tricky: you need to count all the premiums you paid over the life of the policy. Not just the ones you remember. Not just the recent ones. All of them.
Check your policy statements. Call your insurance company. Get the exact number. Because if you underestimate your premiums paid, you’ll overpay your taxes.
And if you overestimate them (maybe you think you paid more than you actually did), the IRS will catch it eventually — because your insurer reports the distribution amount to them too.
Get it right the first time.
Mistake #2: Misreporting policy loans
Policy loans confuse everyone. Here’s what you need to know:
If you surrendered the policy with an outstanding loan, the insurance company deducts the loan from your cash surrender value before they pay you. But the IRS still treats the loan as part of the distribution for tax purposes.
Your 1099-R should show the total distribution (cash you received + loan amount). But sometimes insurers report it incorrectly, showing only the cash you received.
If that happens, you need to add the loan amount back in when calculating your taxable gain. Otherwise, your cost basis calculation will be wrong.
Example: You received $40,000 in cash, but you had a $10,000 loan. The total distribution is $50,000, not $40,000. If your 1099-R only shows $40,000, you’ll need to correct it on your tax return.
And here’s the nasty one: if your policy lapsed with an outstanding loan, you owe taxes on the loan amount even though you didn’t receive any cash. Don’t ignore the 1099-R just because you didn’t get a check. The IRS still expects you to report it.
Mistake #3: Ignoring state tax implications
Everything we’ve talked about so far is federal tax.
But most states tax life insurance surrenders too — and the rules vary by state.
Some states follow federal rules exactly. Others have their own quirks. A few states (like Florida, Texas, and Washington) don’t have state income tax at all, so you’re off the hook.
But if you live in California, New York, or most other states, you’ll owe state income tax on your surrender gain in addition to federal tax.
Don’t forget to factor this in when calculating what you’ll actually walk away with.
Check your state’s department of revenue website or talk to a local tax professional to understand your state’s rules.
Mistake #4: Assuming all life insurance withdrawals are tax-free
People hear “life insurance is tax-free” and assume that applies to everything.
It doesn’t.
Death benefits are tax-free. Almost always.
Surrenders, withdrawals, and unpaid loans can be taxable if there’s a gain.
And if you have a Modified Endowment Contract (MEC), even withdrawals up to your cost basis can be taxable — because MECs flip the tax treatment upside down.
Don’t assume. Know your policy type. Know the rules. Calculate the gain.
Otherwise, you’ll get a surprise tax bill you weren’t expecting.
Tax Planning Tips to Reduce or Manage Liability
If you’re sitting on a life insurance policy with a big gain, surrendering it all at once might hit you with a tax bill you don’t want.
Here are three strategies to reduce or manage that liability.
Strategy #1: Time your surrender strategically
The gain on a life insurance surrender is taxed as ordinary income. That means it stacks on top of your other income for the year — salary, business income, capital gains, everything.
And if that pushes you into a higher tax bracket, you’ll pay more.
Example: You’re single and earn $80,000 a year. You’re in the 22% federal tax bracket. You surrender a policy with a $30,000 gain. Now your income is $110,000, and part of that gain gets taxed at 24% instead of 22%.
But what if you waited until next year — a year when your income is lower?
Maybe you’re retiring. Maybe you’re taking a sabbatical. Maybe your business had a down year. If your income drops, your surrender gain gets taxed at a lower rate.
Or you could split the surrender across multiple years by taking partial withdrawals instead of surrendering the whole policy at once. Withdraw part of the gain this year, part next year. Spread the tax hit over time.
This only works if your policy allows partial withdrawals (most do). And you’ll need to make sure the policy doesn’t lapse while you’re doing this.
Bottom line: Don’t surrender in December just because you need cash. Think about the timing. A few months can make a big difference.
Strategy #2: Use a 1035 exchange to defer taxes
Here’s a move most people don’t know about: a 1035 exchange.
Named after Section 1035 of the tax code, this lets you transfer the cash value from one life insurance policy to another — or from a life insurance policy to an annuity — without paying taxes on the gain.
It’s a tax-deferred exchange. You’re not cashing out. You’re moving the money into a new policy or annuity, and the IRS lets you do it without triggering a taxable event.
When does this make sense?
- You don’t like your current policy (high fees, bad performance, outdated terms), but you don’t want to pay taxes on the surrender gain
- You want to convert your life insurance into an annuity for retirement income
- You’re moving coverage from one insurance company to another for better terms
The rules are strict. The exchange has to be done properly — directly from one insurer to the other, with no cash going to you in between. If you take the money first and then buy a new policy, the IRS treats it as a taxable surrender.
Work with your insurance agent or financial advisor to make sure the 1035 exchange is set up correctly. Done right, you avoid the tax bill entirely.
Strategy #3: Work with a tax advisor before surrendering a large policy
If your policy has a big gain — say, $50,000 or more — don’t just surrender it and hope for the best.
Talk to a CPA or tax advisor first.
Here’s what a good advisor will help you figure out:
- Whether surrendering makes sense, or if there’s a better option (like a 1035 exchange or taking a loan instead)
- How the surrender will impact your taxes this year (and whether timing it differently would save you money)
- Whether you qualify for any deductions or credits that could offset the tax hit
- What your total tax liability will be (federal + state + any penalties if it’s a MEC)
A good advisor might also run the numbers on alternatives. What if you kept the policy and borrowed against it instead? What if you did a partial withdrawal? What if you converted it to a paid-up policy and stopped paying premiums?
Sometimes surrendering isn’t the best move — even if you need cash. There might be a smarter way to access the money without the tax hit.
And if you do surrender, the advisor will make sure you’re reporting it correctly so you don’t overpay (or underpay and get audited).
For a policy with a large gain, a few hundred dollars in advisor fees can save you thousands in taxes.
Conclusion:
Here’s the truth: calculating taxes on a life insurance surrender isn’t complicated. But it requires one thing most people don’t have — accurate records.
If you know your total premiums paid and your cash surrender value, the math is simple. Subtract one from the other. That’s your taxable gain.
But if you’re guessing at your cost basis or ignoring policy loans, you’ll either overpay taxes or set yourself up for an IRS problem down the road.
Keep good records. Save your policy statements. Know what you’ve paid in. And when it’s time to surrender, get the exact numbers from your insurance company before you file your taxes. That’s how you avoid mistakes.
Life insurance is both a protection tool and a financial asset. Used wisely, it protects your family and builds cash value you can access when you need it.
But like any financial tool, it works best when you understand the rules — especially the tax rules. Now you do.
Leave a Reply