Withdrawal from life insurance

Forum|Forum|3 years ago
July 26, 2023
3 replies
75 views

I have withdrawn a large amount from my paid up life insurance. What are my tax obligations?

Ask the Experts - Retirement - July 2023

Best answer by Bozaya

Hello @Animom ,

The tax obligations associated with a withdrawal from a paid-up life insurance policy depend on several factors, including the amount of the withdrawal, the basis of the policy, and the type of policy.

If the amount you withdrew is less than the amount of premiums you have paid into the policy over the years, then the withdrawal is generally not taxable. This is because the portion of the withdrawal that represents a return of your premiums is considered a tax-free return of capital. However, if the amount you withdrew is greater than the premiums you have paid into the policy, then the excess amount may be subject to income tax.

Here are links with additional information:

https://turbotax.intuit.com/tax-tips/general/is-your-life-insurance-taxable/L0GiBZdB6

https://ttlc.intuit.com/community/retirement/discussion/life-insurance-surrender/00/517127#:~:text=For%20a%20policy%20on%20which,why%20it%20builds%20over%20time.

I hope this helps.

Jackstar221

Level 6

Here is an IRS article about proceeds under life insurance:

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds/life-insurance-disability-insurance-proceeds

This is another good one:

https://www.irs.gov/help/ita/are-the-life-insurance-proceeds-i-received-taxable

If you surrender your life insurance, the total of premiums you have paid into the policy is known as the cash basis. When you surrender the policy, the amount of the cash basis is considered a tax-free return of principal. The amount you receive over the cash basis will be taxed as regular income, at your top tax rate.

BozayaAnswer

Alumni - Intuit

Hello @Animom ,

Here are links with additional information:

https://turbotax.intuit.com/tax-tips/general/is-your-life-insurance-taxable/L0GiBZdB6

https://ttlc.intuit.com/community/retirement/discussion/life-insurance-surrender/00/517127#:~:text=For%20a%20policy%20on%20which,why%20it%20builds%20over%20time.

I hope this helps.

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Esther M

Level 4

Dear Animom,

Congratulations on your fully paid-up life insurance. Wow, you don't have to pay anymore premium!

This question is actually better answered by your insurance company because you have not provided enough information about the type of life insurance policy and your basis in the policy.

If its a life insurance policy with cash value, you can take out an amount equal to your total premium payments without owing taxes. If your withdrawals exceed your basis in the policy, you will owe taxes on the withdrawal.

Also earnings in the policy have been growing tax-deferred, therefore you will pay tax on the earnings at your ordinary income tax rate.

I hope this gives you a fair idea of the ax implications of the withdrawal.

Sincerely

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