Life insurance surrender

[sna8k]

I surrendered my life insurance policy. Got a check for 1745.36  but not a 1099

[AmyT · Accepted solution]

For a policy on which you paid the premiums, taking the cash value of the policy is not taxable income.

The cash value of the policy is essentially the amount of premiums paid in excess of the cost of purchasing the policy, which is why it builds over time.  As long as you (as opposed to an employer) paid the premiums, you are getting your own money back.

[Gail7]

Hello,

I am trying to figure out my tax stuff early this year so can maybe do a doneradvisedfund.

Anyway, I was just reading your response to a question on life insurance and I am confused by the " statement of surrender" I received back in August.

It states that " the taxable gain amount is $2,238.46.  So , is that considered a capital gain or ordinary income?

My proceeds were significantly larger as my father bought this policy for me in 1960!  Need i say more?

Thank you!

Gael

[dmertz]

The taxable gain on a surrender of an insurance policy is ordinary income, regardless of how the gain in the insurance plan came about.  Near the end of January you'll receive a Form 1099-R with $2,238.46 in box 2a and code D along with code 7 in box 7 (or code 1 instead of code 7 if the contract was considered to be a modified endowment contract, which would make the gain subject to a 10% early-distribution penalty).

[Gail7]

Thank you for the information!  Now, I am trying to find on TurboTax how and where to enter this information?

I am trying to decide on donations of appreciated funds and stocks for donations to "harvest" some gains. ( ( I doubt that " harvest" is the correct terminology when it comes to "gains.")

Thank you for your quick response!

[dmertz]

Enter a Form 1099-R Wages & Income (or Personal Income if using TurboTax Home & Business) -> Retirement Plans and Social Security -> IRA, 401(k), Pension Plan Withdrawals (1099-R).  If asked, indicate that the distribution is from a nonqualified plan.

[Gail7]

Thanks!

Another question:  I traveled to Costa Rica for dental work ( not cosmetic ). The dental work was $4000.00, but the travel expenses were $2000.00.  Can I deduct the entire $6000.00?

Thank you!!

[billjans]

l surrendered a whole life policy that was issued in 1990 and received the cash value which was less than the amount of premiums paid.  However, over the years I used the dividends on the policy to buy additional insurance, so now I believe my basis has been reduced by the total of dividends that were kept in the policy and not paid out to me.  So, the taxable income on the 1099-R was computed as the surrender value less the basis resulting in a large amount of tax owed on the dividends now that the policy has been surrendered.  Is this a correct description of what happened?  Thanks for your help! 

[DianeW777]

Perhaps.  If you used the dividends from the surrendered policy to purchase other insurance, it's possible you have no cost basis (after-tax dollars) left in the one surrendered. If that is the case then all of the surrendered amount will be taxable.  The only way to know for sure is if you have kept track of all the money you paid for the policy over the years and the dividends that were used to purchase another policy. And, if applicable, any amount that were withdrawn for other reasons over the years would also have an affect on your cost basis.

Check with the company to see if they have a history of your transactions to help you determine if the entire amount should be taxable.

@billjans

[billjans]

Here's some additional information.  The dividends were used to purchase additional insurance for the same policy.  Then at some point in the past, the additional insurance began to be used to pay the premiums.  By the time the policy was surrendered, all of the additional insurance was used up, and the final premium was paid out of pocket.  I am trying to figure out how the company computed the basis for the 1099-R.  Unfortunately, I have only a few of the more recent annual statements.  I contacted the insurance company and asked for the details over the life of the policy but have not received a reply.

[DMarkM1]

Generally, if you did not receive any cash dividends over the life of the policy, they were all re-invested for additional insurance, then your cost basis is still what you paid out-of-pocket for premiums. 

Essentially, when dividends were paid your cost basis was reduced, but when re-invested it added to your cost basis so they cancelled each other out. 

If you did receive cash dividends at any point your cost basis was reduced.  When you paid the remaining premium out of pocket, your cost basis increased.

As you mention your insurance company will have all that information.  

[billjans]

Thanks for all of your help.  How about the last step in the process where I used the additional paid up insurance to pay the premiums, so the additional paid up insurance was reduced?  Does this have any bearing on how the basis was calculated and on the taxes that I would owe?  At this point the insurance company says I would owe about $12,821 in additional tax based on an additional $53,422 in taxable income.

[DianeW777]

It depends on what money you already paid tax on and the amount you did not.  You will have to check with the insurance company to find you actual cost investment which will help determine the taxable amount.  We will not have this information for you.

@billjans