In my somewhat limited experience, when you cash in a whole life policy, be it the entire policy or only part of it, if anything is taxable the insurance company will send you a tax reporting document of some type. I know when I cashed mine in over 10 years ago, I received a 1099-R for the taxable portion of the payout. My taxable portion was basically the dividends that has accrued over the life of the policy.
