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Gains Tax on Surrendered Life Insurance Policy

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dm8711
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Gains Tax on Surrendered Life Insurance Policy  Reply with quote  

I am new to the Forum, so forgive me if this question has been answered. I did a search and didn't come up with this question.

I currently have a Universal Life Policy which I have had for 19 years. I did not fund it for the future, I only covered the monthly due and now that my kids are grown, I no longer need this amount of coverage. Not to mention the company I am with appears to be in financial trouble, and have been downgraded to a B- rating. I am 55 years old, and there are no surrender fees anymore.

I have paid in just over $19,000 over the life of the policy, and there is a $4100 Surrender Value.

My question...Can I just put the $4100 in the bank, or do I have to roll it in to some type of annuity to protect it from taxes ?

My (limited) understanding is that since there is not more money than I paid the surrender amount won't be subject to any Gains Taxes, is this accurate ?

Thanks for any professional help I can get to ease my weary mind !
Post Tue Dec 06, 2011 5:46 pm
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coaster
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If you go to the IRS web site and type in the search box "life insurance surrender" you'll find quite a number of IRS bulletins and tax topics come up. I'm sorry, I don't have time to research them myself, and I haven't been in the biz for quite a while (in fact VUL's were pretty new products back then and I didn't get into them at all). A VUL is a tax-advantaged product so my GUESS is that anything over the value of the cost of the life insurance portion is going to be considered gain. But if you get an answer, please let us know what you find out! Smile

~Tim~
Post Tue Dec 06, 2011 7:22 pm
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dm8711
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Thanks Coaster for your quick response  Reply with quote  

The IRS is where I started this quest. (Rule 2009-13) That is how I got the idea that mine may not qualify for taxes. But every one of their examples pertains to a person that surrenders while he still owes fees and has insurance cost deductions, so it was a bit confusing as to when and what is gain. I wasn't sure if this was the correct rule or not. My searches came up with hundreds of possible answers. javascript:emoticon('Shocked')

As I see it, the cost of my Insurance (premiums paid over 19 years) is $19,000. The surrender value is $4100, which is well below what has been paid, and there are no fees due, so I kind of get the idea that I can just stick it in the bank without reporting it as income ? javascript:emoticon('Question')

I am hoping to get confirmation on my theory before I tell the Insurance Company where they can stick their policy and run with the cash!

I am looking at this now because I just got a letter telling me that my rates are going up 30% because they have had to pay out on more deaths than they anticipated ! Wow ! So I checked into them and they have been downgraded to a B- rating in the last couple years, and a 74% disapproval rating. This company was not my original choice. My company was sold to them several years ago. I even found hints that the CEO's home was foreclosed on in 2008.......So I think it's time to bail !

Oh, and to top it off....the agent that sold me the policy.....he bailed out on them about four years ago. He couldn't deal with them anymore. Apparently non pay issues pertaining to elderly care. He had no answers for me as far as taxes either. He suggested the annuity. Don't really want to do that if I don't have to.
Post Tue Dec 06, 2011 9:54 pm
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coaster
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Boy, I sure don't blame you!!

This might be one of those gray areas where nobody really knows, and yes, I'm including the IRS. If you have a pretty good, logical, explanation of why what you're doing conforms to tax law, and you can document it, then I think you have a pretty good shot at making it fly.

~Tim~
Post Wed Dec 07, 2011 8:31 am
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