Are Receipts From Surrendered Life Insurance Policies Taxable?

When you receive a benefit from a life insurance policy, it is generally not subject to income tax. The policy may be subject to taxation, however, if you surrender the policy.

Identification

To find out whether your life insurance policy is subject to taxation, check your last life insurance policy statement. If the total net cash value in your policy is more than the premiums you've paid into the policy, then any receipts from the policy will be taxable.

Significance

The significance of taxing life insurance proceeds is that the life insurance policy will lapse. This means that you lose your life insurance contract and you will have to requalify for insurance if you want any life insurance benefits in the future.

Prevention/Solution

Don't cash in your life insurance if you think you may need it in the future. You will most likely need a life insurance policy for burial expenses, so keeping even a small policy may be beneficial.

References

• "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007