What is considered taxable income on a surrendered life insurance policy?

[SweetieJean · Accepted solution]

You will get a 1099-R. Normally, only the excess of the cash value over the premiums paid is taxable.

[bwa]

If you cash in a life insurance policy you may have taxable income. The taxable income would be -

• the cash surrender value that you received, minus
• premiums paid over the life of the policy. On a mutual policy, premiums are net of participating dividends.

Generally, this only results in income on older policies. Your insurance company should send you a Form 1099-R for the income to report.

[bostonbenny]

I have not received a 1099-R from the Insurance Co. When are they required to send one out?

[bwa]

They were required to send one out by February 1.

If you didn't receive one, it's possible your payout wasn't taxable.  If in doubt, contact the insurance company.

[billjz1]

Is the taxable amount entered as a dividend or pension/IRA payout?  What section of Turbotax do you use?

[dmertz]

If the distribution is taxable, the insurance company will provide you with a Form 1099-R near the end of January.  You'll enter that under Retirement Plans and Social Security -> IRA, 401(k), Pension Plan Withdrawals (1099-R).  Box 2a of the Form 1099-R will have the taxable amount.

[billjans]

If you did not receive a 1099-R from your insurance company and you are confident that you would have received it if it was mailed to you, for example your address has not changed recently, then it is likely the 1099-R was not sent to the IRS either.  

[dmcniff2]

the TurboTax program requires that I select that the distribution from the 1099-R came from a qualified or non-qualified plan. It is neither. How do I respond in the software. There seems to be no other choice.

[RogerD1]

The 1099-R for life insurance proceeds would be considered a non-qualified plan distribution.

[dmcniff2]

Thank you for responding. I want to be clear. This distribution that I have is not a total distribution - such as in the case of death proceeds or a cashing in of the policy - it is a distribution of dividends that exceed the premiums paid in over the life of the policy. The policy remains in place. The IRS considers that a taxable gain and "normal income". Why doesn't TurboTax offer that alternative in its question which only allows me to declare that it's from a "plan" either qualified or non-qualified. It is neither! It should be easy to make the answers include the correct choice. And to apply it to the appropriate income section on the 1040. Why hasn't this change been made? On what line on my 1040-SR will it be reported?

[RogerD1]

There are only two choices for distributions from a 1099-r and those are qualified or non-qualified.  Distributions from a life insurance policy are considered a Non-qualified plan.  After you enter the 1099-R from the insurance company, you come to a screen stating "What kind of retirement plan do you have with [insurer name]?".  The wording for Non-qualified plan on this page states "Includes life insurance policies, private or purchased commercial annuities, and military retirement plans".

The taxable dividends from the 1099-R will be added to any other distributions of pensions and annuities on line 5b on the Form 1040, where it will be taxed as normal income.