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Level 2

Question

If I cancel a universal life policy with a loan against it, how bad will the taxes be?

Forum|Forum|1 month ago
May 25, 2026
1 reply
51 views

If I cancel a life policy with a loan against it that is less thank the cash value what will happen?

TurboTax Online

Alumni - Expert

Alumni - Expert

It depends on how much you paid into the policy compared to its total cash value.

You will owe ordinary income taxes if the total cash value, including the amount used to pay off your loan, is greater than the total premiums you paid into the policy.

The IRS calculates your tax liability the exact same way whether you have a loan or not, so unfortunately, it is possible to have taxable income even if you don't receive any money upon cancellation of the policy.

IRS Publication 525

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lynx8Author

Level 2

Thanks for the info.