I got a 1099R from ins co for cashing in a whole life policy I was given. Ins Co. chose code 1 Early dist in box 7, so TT is adding 25% addl tax. Is that correct?

[tsmonnier]

Since it wasn't a retirement account doesn't seem like I should have to pay a 10% penalty for cashing in an insurance annuity I was given as a gift. Has the insurance company chose the wrong distribution code?

[fanfare]

generally a bad idea to cash in a whole life policy once it has accrued cash value

the agents will do their best to talk you into it.

too late now you have to pay tax and a 10% penalty if you are under 59 1/2.

[Carl]

Not all inclusive there fanfare. First, be aware that there are many types of "whole life" policies, and I'm only familiar with one type. Your mention of "annuity" makes me think that the below may not be all inclusive of your specific policy.

I had a whole life policy which I cashed out years ago. It had a cash value of about $45K, of which $12K of that was "earnings" (dividends, interest and the such). So my 1099-R only indicated the earnings in box 1, which is correct. The code in box 7 was 1, which is correct. But (and this really matters) the IRA/SEP/SIMPLE box was "NOT" checked. I did pay tax on the earnings, but not a penalty.
Based on your number of 25%, that doesn't sound like a penalty to me. It sounds more like the amount in box 1 put your AGI over:
$82,500 if filing single, Married filing Separate, or Head of Household
$165,000 if filing Married filing Joint.
THe amount over the above is taxed at the 24% rate. Additionally, when your AGI exceeds those amounts, there are a number of deductions and tax credits you no longer qualify for. Now as you work through the program and enter all your qualified deductions, that "may" reduce your AGI, thus putting you into the lower 22% or even 12% tax bracket.