Why Taxable?

[gracenotes]

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

Hello, I just received a 1099R form informing me that the proceeds of cashing out a life insurance policy are 100% taxable. This was a policy that was purchased on my life by my parents, who are both deceased.

How can this be taxable? This policy was purchased by my parents 60 years ago with after-tax dollars and the interest has grown over time.

 

[tranquility]

This policy was purchased by my parents 60 years ago with after-tax dollars and the interest has grown over time.

There you go right there. Tax deferred is not the same as tax free.

 

[LdiJ]

There you go right there. Tax deferred is not the same as tax free.

While I agree, there is the question that the 1099-R seems to be indicating that the distribution is 100% taxable. That is not normal with a whole life policy. The interest is tax deferred but the principal that the interest was calculated on should not be.

However, since the policy was purchased 60 years ago I suspect that the original principal is pretty tiny.

OP, look carefully at the 1099-R again. Are you sure that Box 2A is the same as box 1? Is there any amount at all in box 5?