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 taxable income.

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

– Premiums Paid: $40,000

= Taxable Income: $10,000

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 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.

You can learn more about whether you need insurance here.

Need personal help? Click here for additional free resources or to find an accountant, attorney, or other professional near youRemember: This blog post and the comments provide generalized information that may be out of date or inaccurate for your situation. Always schedule a personal consultation with an appropriate licensed professional in your area before taking action. For full terms of use, click here.

Have general questions about this post or want to learn more about a related topic? Please leave a comment at the bottom of the page. Comments are public, and I can’t provide individual advice, but it helps me make the posts more useful for the future. Please do not post personal information. If you need personal assistance, please contact the relevant government agency or hire an appropriate professional near you.

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

  1. 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.

  2. Ruby M Adarmes | December 4, 2020 at 10:48 am | Reply

    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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