Cashing in Life Insurance

[lilbutterfly 60]

What is the name of your state (only U.S. law)? Ohio

I have paid on Life Insurance for 15 years. I had high premiums because of health issues. My policy was transferred to my son. He is the owner. He does not want to continue paying the premiums. I can no longer pay them. Trough the years I had taken out a few loans. Right now the cash surrender value is under $4000. This is a whole life policy. Paying on this policy was like putting money into the "Bank". There are no gains here. I paid $79 a month for 15 years.

The policy will be cashed out to pay for my cremation. My son said the form from the Insurance Company states something about taxes or else he feels taxes are due. I do not know. He is not too good with understanding things like this. I have researched and I say there are no taxes do. I just don't want him coming to me and raising hell. This is why I am posting my question here at the Forum.




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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
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


Read more: What Is the Taxation of Cashing in a Life Insurance Policy? | eHow.com http://www.ehow.com/facts_7226798_taxation-cashing-life-insurance-policy_.html#ixzz28dRqJ98n Thank You

 

[LdiJ]

What is the name of your state (only U.S. law)? Ohio

I have paid on Life Insurance for 15 years. I had high premiums because of health issues. My policy was transferred to my son. He is the owner. He does not want to continue paying the premiums. I can no longer pay them. Trough the years I had taken out a few loans. Right now the cash surrender value is under $4000. This is a whole life policy. Paying on this policy was like putting money into the "Bank". There are no gains here. I paid $79 a month for 15 years.

The policy will be cashed out to pay for my cremation. My son said the form from the Insurance Company states something about taxes or else he feels taxes are due. I do not know. He is not too good with understanding things like this. I have researched and I say there are no taxes do. I just don't want him coming to me and raising hell. This is why I am posting my question here at the Forum.


Thank You

Whole life policies normally have a taxable gain element when you cash them out. Your cash value grows by not only the payments that you made, but by tax deferred interest or dividends. Therefore, unless you have an unusual whole life policy, I would expect there to be a taxable portion. That will not be limited to just the 4k you mentioned either. Since your previous dispursements were loans, then it will count as that money coming out as well.

 

[ecmst12]

If it's being used to pay for your cremation, why not wait until you actually NEED to be cremated and just collect the payout rather than cashing it out now?

 

[lilbutterfly 60]

I can no longer afford it any more. At $79 a month fir 15 years--I paid a lot of money into this policy. So how is there any gains? There isn't . I lost.

 

[LdiJ]

I can no longer afford it any more. At $79 a month fir 15 years--I paid a lot of money into this policy. So how is there any gains? There isn't . I lost.

You do not understand what a whole life policy is. Under a whole life policy you are paying for life insurance, plus a portion of your payment (only a portion) goes towards a cash value...a type of deferred savings. Your cash value would never equal 79.00 x 15 years x 12 months because that does not account for the portion of the payment that covered the actual life insurance premium.

 

[lilbutterfly 60]

You do not understand what a whole life policy is. Under a whole life policy you are paying for life insurance, plus a portion of your payment (only a portion) goes towards a cash value...a type of deferred savings. Your cash value would never equal 79.00 x 15 years x 12 months because that does not account for the portion of the payment that covered the actual life insurance premium.

You misunderstood me. That was not what I was saying. There is no gain for me. I have not gained any money or profit so how can I be taxed? The money I used was already taxed.

 

[LdiJ]

You misunderstood me. That was not what I was saying. There is no gain for me. I have not gained any money or profit so how can I be taxed? The money I used was already taxed.

Yes you have gained interest and/or dividends on the cash value of your life insurance policy, which you were not taxed on in previous years. Its no different than having money in the bank and getting paid interest on that money. The only difference is that when you have money in the bank, you report your interest income yearly. With cash value of life insurance, the interest does not get reported, and therefore taxed, until you cash out the policy.

 

[lilbutterfly 60]

I talked to an insurance man. I have paid more into the policy than the payment of dividends and interest that I received. I paid on the policy for 15 years. I also researched it on the net. There isn't any gains here.

 

[lilbutterfly 60]

Is the cash value of life insurance taxable?In: Insurance [Edit categories]
Answer:.Cash Value of Life Insurance Taxable?
There are two ways to access cash in a life policy. Withdrawals and loans. You are not required to pay back loans from a policy, sincy you are loaning yourself your own money.

If you withdraw the money any amount over what you have paid in premiums is taxable.

If you loan out the money it is not taxable as long as the policy is still in force. You have to be carefull not to take out too much in a loan or it will implode the policy. Talk to your agent or the company to find out the max loan amount available while still keeping the policy in force.

Most people withdraw up to what they have paid in, and then loan out the rest.
If the cash value grows too large compared to the death benefit it becomes a MEC or modified endowment contract, and is then subject to a 10% tax. A good agent who is knowledgable in designing a policy will be able to keep this from happening.
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) While life insurance policy is enforce, the cash value of the policy and its growth are not considered taxable. (2) If you surrender or cash-in the policy, and the total amount of cash value returned to you is less than the total amount of premiums paid, it is considered a return of principle and is not taxable. (3) If the cash value returned to you is greater than the amount of premiums paid, the amount in excess of premiums paid is considered a "gain" and is taxable as income. (4) If the policy you surrender (cash-in) is considered a MEC or Modified Endowment Contract (the company can inform you if it is), 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.



Read more: http://wiki.answers.com/Q/Is_the_cash_value_of_life_insurance_taxable#ixzz291ORjgYa

 

[LdiJ]

Is the cash value of life insurance taxable?In: Insurance [Edit categories]
Answer:.Cash Value of Life Insurance Taxable?
There are two ways to access cash in a life policy. Withdrawals and loans. You are not required to pay back loans from a policy, sincy you are loaning yourself your own money.

If you withdraw the money any amount over what you have paid in premiums is taxable.

If you loan out the money it is not taxable as long as the policy is still in force. You have to be carefull not to take out too much in a loan or it will implode the policy. Talk to your agent or the company to find out the max loan amount available while still keeping the policy in force.

Most people withdraw up to what they have paid in, and then loan out the rest.
If the cash value grows too large compared to the death benefit it becomes a MEC or modified endowment contract, and is then subject to a 10% tax. A good agent who is knowledgable in designing a policy will be able to keep this from happening.
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) While life insurance policy is enforce, the cash value of the policy and its growth are not considered taxable. (2) If you surrender or cash-in the policy, and the total amount of cash value returned to you is less than the total amount of premiums paid, it is considered a return of principle and is not taxable. (3) If the cash value returned to you is greater than the amount of premiums paid, the amount in excess of premiums paid is considered a "gain" and is taxable as income. (4) If the policy you surrender (cash-in) is considered a MEC or Modified Endowment Contract (the company can inform you if it is), 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.



Read more: http://wiki.answers.com/Q/Is_the_cash_value_of_life_insurance_taxable#ixzz291ORjgYa

That basically says the same thing I did, but uses the wording "greater than the amount of premiums paid" and that is inaccurate. The correct wording is "greater than the amount your policy invested into cash value".

I am both a tax professional and the daughter of a former insurance agent, so I have some familiarity with the subject.

 

[Betty]

That basically says the same thing I did, but uses the wording "greater than the amount of premiums paid" and that is inaccurate. The correct wording is "greater than the amount your policy invested into cash value".

I am both a tax professional and the daughter of a former insurance agent, so I have some familiarity with the subject.

I worked for a life ins. co. (for what it's worth) & agree with LdiJ's posts.

 

[lilbutterfly 60]

Look up Publication # 525 IRS. You do not pay taxes if it is less than what you have paid into premiums for the Policy. It is not classified as gains. Thank you

 

[Betty]

However, you still can't just consider the $79.00 a mo. paid for 15 yrs. & the less than $4,000 CV.

It's possible to still have taxable income on surrender - you have to consider dividends, unrepaid loans (for examples). It's possible for unrepaid loans to even exceed "total prems. paid" & there would be taxable income there.

If you believe you have no gain/taxable income - fine. We can't say you don't though. We don't know anything about your dividends, how much your loans were for, if they are paid off (or if you still owe on them & if so, how much), etc. You can always take your complete information to a tax accountant for review & advice. If you don't talk to anyone & tax is owed, it will be shown on form 1099-R you will receive along with showing total proceeds received.

Right out of the company I worked for handbook: If policy loans are outstanding upon surrender, they will cause a reduction in cost basis. The result is that the policy owner will have taxable income upon surrender or lapse of the contract, to the extent that the loans exceed the total premiums paid.

IRS525: If you surrender a life ins. pol. for cash, you must include in income any proceeds that are more than the cost of the life ins. policy. In most cases your cost (or investment in the contract) is the total of the premiums that you paid for the life ins. pol., less any unrefunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. You should receive form 1099-R showing the total proceeds & the taxable part.

 

[lilbutterfly 60]

Why do you persist? Can't you read? You do not know how little my dollar amount the policy is. I do not owe taxes, period ! I read from the IRS.

 

[cbg]

Okey dokey.