Is the cash value of life insurance taxable?

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"Cash_Value_of_Life_Insurance_Taxable?">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.

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

death benefit.

More information:

• 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

  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.