Texas General Lines — Life, Accident, Health and HMOLife InsuranceEasy
A client purchased a $300,000 Whole Life insurance policy 20 years ago. The policy has accumulated a cash value of $75,000. If the client decides to surrender the policy today, what will be the taxable amount if their total premiums paid were $60,000?
- A$0
- B$15,000
- C$75,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: B. $15,000
When a whole life policy is surrendered, the taxable amount is the difference between the cash value received and the total premiums paid. In this case, $75,000 (cash value) - $60,000 (premiums paid) = $15,000 taxable gain.
Why the other options are wrong
- A. This would only be true if the cash value did not exceed the premiums paid, which is not the case here.
- C. This represents the total cash value, but only the gain above premiums paid is taxable.
- D. This represents the total premiums paid, not the taxable gain.
Cash Value Surrender Taxation
Upon surrender of a life insurance policy, any amount received that exceeds the total premiums paid is considered taxable income.
- Only the gain above premiums paid is taxable.
- The policy's face amount is irrelevant for surrender value taxation.
- Premiums paid are considered the 'cost basis'.
Memory trick: Surrender for cash? Only gains get taxed, not your original stash!