Is the cash value of life insurance taxable?
"Cash_Value_of_Life_Insurance_Taxable?">Cash Value of Life
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.
Finally, be aware that a policy loan is not free. That is, the
policy will prescribe the interest rate at which the loan is made.
While it is generally less than the market rate of interest would
be for a commercial or personal loan, you will end up paying back
more than you borrow, or the dividend that you might otherwise
receive (in the case of a mutual company) may be less to account
for the interest on the loan. Check the terms of the policy for
details. If the loan is not repaid prior to the time of death, the
loan balance, including accrued interest, will be deducted from the
- 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 your policy invested
into cash value, it is considered a return of principle and is not
taxable. (3) If the cash value returned to you is greater than the
amount your policy invested into cash value, the amount in excess
of the amount invested into cash value 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 adviser if this is the
- 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