What Is the Taxation of Cashing in a Life Insurance Policy?
When you cash in your life insurance policy, you are canceling your life insurance coverage. In exchange, the life insurance company agrees to give you the cash surrender value of your policy. But, depending on your circumstances, these proceeds may be taxable.
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Function
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Cashing in your policy means a full surrender of the policy in exchange for the equity value of the policy. This means that you cancel the policy and request that the insurance company give you the cash value that is available in the policy.
Significance
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Any cash value amount in excess of the premiums you've paid into the policy is considered a gain in the policy. This gain is taxable at ordinary income tax rates. If your cash value does not exceed the premiums you've paid into the policy, there is no gain in the policy and no income tax due on the proceeds.
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Considerations
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Make sure that you are carefully weighing the benefits of cashing in your policy with the potential drawbacks. Cashing in your policy could put you into a higher tax bracket for the year you cash in your policy.
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