If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal (and possibly state) income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out (plus any loans outstanding) and your basis in the policy. Your basis is the total premiums that you paid in cash, minus any policy dividends and tax-free withdrawals that you made. The insurer will most likely send you a 1099-R showing the total proceeds and the taxable part.
**Answers are correct to the best of my ability but do not constitute tax or legal advice.
