What is the Tax on the Cash Surrender Value of a Life Insurance Policy?

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If you cash in a life insurance policy, you may need to pay tax on the cash surrender value. Any amount you receive over the amount of premiums you paid is generally taxable income.

Why is a surrender of life insurance taxable when a death benefit usually isn’t?

The reason the life insurance policy holder has to pay taxes on a surrender is that you’re making an investment. When you invest your money and get a return, you have to pay taxes.

The government has made a policy decision to not tax the beneficiary of a death benefit, but this doesn’t apply to a surrender.

Calculating the Tax on the Cash Surrender Value of a Life Insurance Policy

Think of your life insurance policy like a savings account that you can withdraw money from. The amount you deposit is yours and you can take it back tax free. The interest is income and is taxed.

For a life insurance policy, your premiums are the deposit. The amount of the cash surrender value above your premium payments is the interest.


  • Cash Surrender Value: $50,000
  • – Life Insurance Premiums Paid: $40,000
  • = Taxable Income: $10,000

*This is a general example to explain the concept, but the exact math will vary. See your policy for details.

How do you pay the taxes?

Your insurance provider may give you the option to have taxes withheld. If not, you will need to make an extra tax payment to the IRS.

You can typically pay the taxes owed on your life insurance payout when you file your tax return. However, you should be aware of the estimated tax rules. There are some cases where you may need to make a tax payment by the end of the quarter to avoid paying interest if you wait until you file to pay.

The taxable portion of a life insurance policy cash out is ordinary income subject to the same income tax rates as your wages, investment income, and other taxable income.

Use a tax calculator to check your withholding, figure out how much money to set aside for taxes, or to check if you need to make an estimated tax payment.

What if you already spent the money and can’t pay the taxes?

If you spent the full amount of the cash surrender value without realizing you’d owe taxes and don’t have money to pay the taxes, the IRS will charge interest and failing to pay penalties until you pay the amount owed. If you can’t pay in full, you may want to consider an installment agreement or other payment options.

Is the cash surrender option a good benefit of buying life insurance?

Having options gives you more flexibility if your plans change in the future. A financial advisor can help you figure out how much having that option might be worth to you and if this is something you should choose when buying life insurance.

5 thoughts on “What is the Tax on the Cash Surrender Value of a Life Insurance Policy?”

  1. I urge policy holders, to get from the insurance company, yearly statement, as I have just found out, that my policy which I bought in 1988, was surrendered by my advisor in 1999, without me knowing anything about it, and with the $12,117.48 that she received, she went on to purchase 3 more policies without my consent and finally in 2020, and kept them hidden from me, with fictitious benefactors in the process, and I’ve never had any insurance since then, as she kept all copies in her filing cabinet, and she is now co owner of the brokerage firm that sold me these policies, beware, please, it is now in criminal court waiting to appear.

  2. My father purchased a life insurance policy for me when I was born (1957.) The policy was eventually paid up and he turned it over to me. He has since passed away, and I recently surrendered the policy. The insurance company said they would not be issuing a 1099-R because my contract was issued prior to 8/13/82, but I’m assuming that I need to include the distribution as income. Should I deduct the premiums paid from the value even though I didn’t pay them?

    • There were some changes to the rules for life insurance policies around that time, but I don’t know the specifics. You might be able to call around and find someone who works on these older policies regularly.

  3. If I used the money to purchase a property, I still
    get penalize for the surrender life insurance policy,
    I have to pay the taxes no matter what.
    Where I have to send the payment to IRS before I get
    penalize with interest. Thank you


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