If you cash out the whole-life policy after it's been transferred to you, you are generally taxed on the amount received above the total premiums paid.
If the transfer is a gift (not a transfer for value), the basis typically carries over from the prior owner. That taxable portion is treated as ordinary income, and the insurance company will issue a Form 1099-R showing the gross and taxable amounts.
For more information, see IRS Publication 525, and the IRS Interactive Tax Assistant
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
