The tax basis for your Pru stock is Zero. You can argue this as some feel that is not correct, however, it isn't worth it because any other basis you give it will have to be deducted from your policy cash value basis IF you sell, rather than as a Death Claim. Therefor, your gain is the full amount you receive for selling it, and yes, it is long term counting from the date the policy was purchased.

You don't supply the correct information to tell you exactly how much the tax will be, but if you're in the 15% bracket (which is probably a fair assumption)the tax will be 5%, if higher, 15%. And you put the transaction on Schedule D and compute your taxes on Schedule D. The dividend they paid is Qualified so you will pay the 5%, or 15% on it also.

Yes you can deduct ANY Medical Expenses, including any insurance premiums paid "after tax". They go on line 1 of Schedule A. This doesn't do you much good unless you itemize, which you should be doing if you own a home and have Dental bills, etc. ed