Distribution from a life insurance policy

Therrmann · ‎February 16, 2020

My wife and I decided to close a small life insurance policy into which we had been paying for more than 30 years. Every year we would get an interest statement and include the interest as part of our income. I received a 1099-r for the distribution. Because I had paid the taxes on this interest through the period of ownership is the distribution taxable?

DavidS127 · ‎February 16, 2020

If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 4c and 4d of Form 1040 or 1040-SR.

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dmertz · ‎February 16, 2020

I assume that this interest that you reported on your tax return was not reported to you on any Forms 1099-INT, so it seems that you made a mistake by including the interest in income over the years. You can amend your 2016 thought 2018 tax returns to correct these mistakes for those years, but earlier tax returns (filed more than 3-years ago) are generally closed tax years for amending to receive a refund.