If you have cash surrender value life insurance, are you liable for taxes on that money? The short answer is yes – if the cash surrender value of your policy is more than $10,000 at the time of surrender. If you’re not sure whether your policy has a cash surrender value, or what the cutoff point is for taxable assets, consult with your tax preparer.
Definition of Cash Surrender Value
Cash surrender value is the amount a policyholder can receive if they choose to cash in their policy before its maturity date. The value of the cash surrender varies depending on the type of policy and the state in which it was issued. Generally, it’s taxable if the cash surrender value is more than the policy’s face value.
Is the Cash Surrender Value of Life Insurance taxable?
When a life insurance policy cash surrender value is paid, there is a potential tax consequence. If the cash surrender value is more than the face amount of the policy, then the excess amount may be taxable. If the cash surrender value is less than the face amount of the policy, then no tax will be assessed.
The IRS has issued two rulings that could impact how cash surrender values are taxed. The first ruling pertains to insurance companies that sell group life insurance policies. In this ruling, the IRS stated that any excess cash surrender value over the face amount of a policy is taxable to the policyholder as long as it does not exceed $2,000. This ruling applies to both single and family policies.
The second ruling pertains to individual life insurance policies sold through an agent or broker. In this ruling, the IRS stated that any excess cash surrender value over $5,000 is not taxable to the policyholder. However, if the excess cash surrender value exceeds $10,000 and is attributable to premiums paid by someone other than the policyholder (for example, premiums paid by a spouse), then it may be taxable to the policyholder.
Conclusion
As long as the cash surrender value of life insurance is used to purchase another form of life insurance, it should be considered a deductible item in the year that it is surrendered. This means that you can reduce your taxable income by the cash surrender value of your life insurance policy in the year that you surrender it. If you have any questions about this or any other aspect of tax law, please don’t hesitate to contact our office for assistance.