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Should a cash out of a life insurance policy be treated as a capital gain or regular income?
Wiki User
∙ 16y ago
Typically, proceeds from life insurance policies are not taxable.
If it is a pension plan/IRA, or a business investment (a contract with a third party where you placed insurance on the third party for your benefit), proceeds even after death may be fully taxable as ordinary income.
However, if a life insurance policy, purchased in the usual matter as a personal expense, is cashed out (surrendered) and there is a lump sum payment of the surrender value, it is just like any other capital transaction. You pay tax on the difference between proceeds and the amount you invested over the years like any other capital asset with a capital gain or loss, presumably long term since there is no cash value for the first few years. You may also have ordinary income from interest or dividends which the insurance company might report on a 1099 int/div
You will receive a 1099 R that provides all the information you need - proceeds, taxable part and they go on 16a & 16b of your Form 1040. If the cash received is part of a viatical or any other type of settlement, there may be other considerations that improve the result.
Wiki User
∙ 16y ago
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