No, a policy owner cannot claim an investment loss (on his/her tax return) if the cost basis is higher than the proceeds received from a full surrender or policy lapse. The tax law does not treat life insurance as an investment asset. In some cases, they might have ordinary income upon a lapse, such as when there is an outstanding loan that is larger than the basis in the policy.
IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and is subject to social security and Medicare taxes.
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