IRS Early WIthdrawal Penalty for Whole LIfe Insurance Policy

Forum|Forum|5 months ago
March 1, 2026
4 replies
169 views

I cashed out a life insurance policy in January 2025. I was 59 but not yet 59 1/2. I requested taxes to be taken out before they sent me the check. I received a 1099-R. Box 7 is Code 7. As I am preparing my taxes, it appears that I am going to be charged a 10% early withdrawal penalty. Is that correct? I realize that I was not 59 1/2 but it was a life insurance policy surrender, not a retirement account. I appreciate your assistance.

Best answer by SusanY1

In that case, say no to the question about if you withdrew it before 59 1/2. This is not a question on your actual tax return it is just a question for the software to know whether or not to add that penalty. Since life insurance distributions don't have their own Box 7 code, TurboTax doesn't know the difference between it and a typical retirement account distribution.

I know it seems odd to intentionally answer the question wrong, but it will ensure that your tax return is prepared correctly and that you're not charged a penalty.

Your research is correct that you are not subject to the penalty for surrender of a whole life policy that is not a modified endowment contract.

SusanY1

Level 15

Can you clarify where you are seeing the penalty? When the Box 7 code is 7, it should not be calculating any penalty.

If you are looking at the refund calculator, it is likely that you are just seeing the difference in the tax withheld versus the actual tax on your income - withheld tax will not always be equal to the actual tax on a distribution.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

KLM1965Author

Level 2

Thank you for your quick reply. When I am preparing the taxes through Turbo Tax and inputting the information about the 1099-R, the question comes up: "Did you withdraw this retirement money early (before the age of 59 1/2)? If I answer YES, it charges me a 10% early withdrawal penalty. If I answer NO, it does not. I want to make sure I file correctly. I've talked on the phone to two Turbo Tax accountants who both tell me that we should be charged the penalty, but all the research I've done, tells me differently. We did withdraw before 59 1/2 but it was not a retirement account or an MEC.