Life Insurance Policy Cancellation

[brshay1]

What are the tax implications for cancelling a life insurance policy that has a cash value?

[AdamNe]

Hello @brshay1 !

Thanks for the question. 

While there may be other considerations to keep in mind when thinking about surrendering your life insurance policy such as surrender fees, the income tax implications are relatively straight forward. 

Out of the total amount you receive in the surrender, the amount you have previously paid in premiums will be considered tax-free return of capital. The remainder is taxed as ordinary income, subject to your normal income tax marginal tax bracket rates. 

I hope this helps! Please let me know if you have further questions. 

Adam, EA

TurboTax Expert