Submitted By: Francis
Answered: July 9, 2013 8:30 am

I’m thinking of cashing in my life insurance policy, which has built up considerable cash value. What happens to it from a tax perspective?

While life insurance proceeds received on the death of the insured are tax free, you may owe taxes when you cash in the policy early. What’s taxable: the excess of the cash surrender value over the premiums you paid. The insurance company can provide you with this information before you take any action.

Before you cash in the policy, make sure that the nontax reasons why you took it out in the first place have been addressed (for example, that your family has enough income in the event of your death). Also talk to an insurance agent; you may be able to continue coverage without additional premiums by using the cash value.

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Tax Glossary

Dividend

A distribution made by a corporation to its shareholders generally of company earnings or surplus. Most dividends are taxable but there are exceptions.

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