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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121187  
Subject: Re: Whole life insurance partial distribution Date: 5/16/2014 3:14 PM
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WendyBG:

"DH has a whole life insurance policy that he opened before we met (about 30 years ago). The policy is self-sustaining since the dividends pay the premiums.

We are childless and the death benefit, while significant, wouldn't make a huge difference to me if DH were to die before I did.

Last year, an insurance agent from the company convinced us that we will probably need long term care insurance more than a death benefit. We set up Long-term care (LTC) policies. The premiums for the policies will be paid by gradual withdrawals from the whole life policy. This will cover the premiums until DH is age 75, after which the whole life policy will be depleted. (It's possible, even likely, that the premiums will rise, which would deplete the policy sooner.)

DH's policy will be paid for by a 1035 exchange, which is not a taxable event.

However, since I am not an owner of the life insurance, my premium can't be paid by a 1035 exchange (since the names have to match). Instead, $1,000 per year will be distributed as a "Surrender of Paid-Up Additions for Cash Value."

The insurance agent told me that distribution of cash value from a whole life policy is FIFO and that the distribution would not be taxable until the cost basis is depleted. I tried to find this on irs.gov but I couldn't find it.

My question is: Is the surrender of partial cash value from whole life insurance FIFO (distributions are not taxed until cost basis is depleted) or LIFO (distributions are taxed immediately until all the growth over the cost basis are depleted)?"


I do not know the answer to your tax question, but I beleive that your agent is correct.

I write, because I have two questions.

Could your spouse not gift you 1/2 of the existing policy? IIRC, there is an unlimited marital deduction for gifts between spouses.

What happens whent he whole life policy id depleted? Do you plan on continuing to pay premiumes for the life insurance?

Regards, JAFO
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