Will Reinstating Life Insurance Reverse Taxation?
Life insurance policies with cash value savings offer a savings account in addition to the life insurance death benefit. The cash value is a special account attached to a permanent life insurance policy. The money in the account can be used for any purpose during your lifetime. If you cash in the policy, however, you may be subject to income tax.
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Process
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When you want to cash in a life insurance policy, you may call your life insurance company. The company will provide you with all of the forms you need to cash in your policy. When you sign the forms to surrender your policy, the transaction is complete. The company will send you a check for the balance of your policy's cash value, which you deposit into your savings or checking account at your bank.
Significance
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When you surrender a life insurance policy, any cash value in the policy may be subject to income tax. Income taxation is determined by whether or not the cash values represent a gain in the policy. A gain is any amount of money in excess of the total premiums paid into the policy.
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Warning
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When you cash in your policy, the process is not reversible. Once the IRS has determined the tax you owe on the policy values' gain, you must pay the tax. Life insurance companies also do not reinstate policies once the surrender paperwork has been processed.
Misconceptions
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While income tax may be due on your policy, it may also not be due. If your policy suffered a loss due to poorly performing investments inside the policy, your policy will not realize a gain. If the cash surrender value, minus any loans, is less than the total premiums you've paid into the policy, no tax is due on the surrender value.
Considerations
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In order for you to cash in a policy and avoid taxation, you must lose money on your life insurance policy. Consider keeping your insurance policy if this is the case. Additionally, consider keeping the policy even if you realize a gain. You can typically borrow against your life insurance policy without lapsing the policy. A company representative can help you determine the maximum amount of money you can borrow without lapsing the policy.
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