This question is just to gain some understanding. Someone on a different forum raised it, and we, not tax experts, have various answers there. Does a deaf benefit affect the calculation of a taxable amount when a UL insurance policy (not variable UL) is cashed out by the insured?What would the taxable amounts for the next three scenarios? 1) Let's say the death benefit is $100k. Policy's length is 30 years. The insured decides to cash it out after 20 years when there aren't surrender fees anymore. He paid in $55k and the cash value is $75K. 2) Same as above, but the cash value is $110k. What's the taxable amount then? Probably not realistic, but for math purposes in case the death benefit affects calculations. 3) When the insured was young and stupid, he saw the UL as an investment vehicle, so he paid much more than minimum premiums to keep the policy alive, would the above the minimum premium paid money be excluded (e.g.the IRS penalizes such investments) from the calculation of the taxable amount? E.g. Instead of the required $55k min. premiums over the 20years, he sent $80k of payments, and the cash value is $125k now. What IRS publication addresses UL insurance cash-outs? BTW, in regards to #1, my answer on that forum was $20k taxed as ordinary income and nothing to do with the death benefit, but someone else said, it's wrong. So, now I'd like get some basic knowledge. Thank you all
Call the insurance company and ask. You don't have sufficient information to calculate the taxable amount. The taxable amount will be reported on a 1099 for the year the policy was terminated. The death benefit does not directly relate to the taxable amount. The higher the death benefit, the higher the premiums.
Well, as I said in my OP, it's not my UL insurance policy, so I have nobody to call. But thanks for your attempt to respond ;-).
What IRS publication addresses UL insurance cash-outs? Pub 525. After you read that you'll see that in any given fact pattern the best answer is "Call the company and ask." If you run into someone who can actually calculate the tax effect based on meticulously-maintained records, notify the press.PhilRule Your Retirement Home Fool
Okay, Phil has posted the IRS publication. If the information you posted is all the information the policy holder has, then they don't have the information necessary to calculate the cost basis.
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