Hi, I would like to convert the cash value of my life insurance to an IRA without paying cap gains. How?

Question

Hi, I would like to convert the cash value of my life insurance to an IRA without paying cap gains. How?

Answer 1

Any gain in your policy would be subject to ordinary income tax, not capital gains.  Assuming that your life policy is not in a qualified account (which is exceedingly rare), the only way to avoid paying tax on a gain avoid recognizing the gain.  You can do this by:

1.  Keeping the policy in force and taking loans on it (this is possible, but can be very tricky in execution).

2.  Doing a like-for-like exchange using a 1035 rollover to another life policy or an annuity.

If you later access money beyond your cost-basis, this will be taxable at that time, so you may just be postponing the inevitable, but it's your decision.  Talk with a qualified tax advisor if you have more specific questions or if your policy is held in a qualified account.

Answer 2

Do you want to cancel your policy?  Or borrow against it?  

In any case, you don't pay capital gains unless you had a GAIN - it's pretty unlikey that your cash value is more than you've paid in, for the insurance, over the years.

However, the amount you can contribute to an IRA is going to be limited.   You can't "roll over" another type asset to get around the IRA contribution laws.

Answer 3

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Answer 4

Are you looking to cash in your life policy.  If you take out the cash value it is looked at as a loan.  And you will be charged interest.  You will have to increase your payment to your policy or it will run out of money and lapse and provide no death benefit.  Please be sure that you understand what you are trying to do.  Life insurance should be sold to cover final expenses.  If you have those covered by other means and have talked this over with an adviser, go forward cautiously.  If not I would suggest that you research a little more.   Good Luck

Answer 5

An IRA (individual retirement annuity) at an insurance company can be transferred to a regular IRA (individual retirement account).  I did that without any tax consequences.

But a surrendered insurance policy is in a different class.  Note that you do not pay tax on the entire cash value, just the gain over premium payments that went into it.  So it may not be as bad as you think.  I did that to pay off some bills and first contribution to a Roth IRA.

If you owe more than $1000 at tax filing time, you may get hit with an under withholding penalty.