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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 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)?


Wendy, your insurance agent is correct.

For an IRS pub. on the subject, the best is probably, Pub. 575, Pensions and Annuities (this includes life insurance issues)

The pertinent topic starts on page 15, Taxation of Nonperiodic payments.
Also known as "amounts not received as an annuity. For such withdrawals, they are tax-free to the extent of the "investment in the contract" (or cost basis, if you will.)

The monthly withdrawals you contemplate may look like, and feel like, an annuity withdrawal, but if they come from a life insurance CSV, they're not.

Conversely, if the withdrawals were from a tax-deferred annuity, it WOULD be taxed on a LIFO basis.

The official language is in Code Section 72(e), but that's almost nonsensical to try and read.

And for an even better plain-English version, here's an article from Kiplinger that says the same thing.

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