How much tax will I pay when cashing in Whole Life Insurance Policy?

Question

My grandfather started a mass mutual whole life insurance policy for me when I was born. I began paying the yearly premiums when he passed 2 years ago. Yearly premium is $250. I am looking to buy my second home and would like to cash out the policy and use the money for a down payment. I am 26 years old and have life insurance through work for $100,000.

If I cash out the entire policy , current cash value is $70,000, what am I looking at for taxes. Will it just be on my 2008 taxes? Taxed as regular income? How much should I set aside in order to cover that income? Thanks for your help.

Answer 1

There should be no tax on the insurance proceeds.  Check with the payor, but trust me, it is all a return of premium, as it is all a waste of money and so it is not "income" just a return of premium and a benefit of the insurance companies.

Answer 2

OK, so who's the policy owner?  

Capital gains tax would be due, on the difference between the premiums paid in, and the cash taken out.  But I seriously, seriously doubt the cash value is $70,000.  I'd guess closer to $2500.  But the policy owner is the only person who can cash it in.

Answer 3

Have the premiums always been 250?

If the premium has always been 250 then the total, in premium, that has been pais is $6500. Subtract 6500 from 70000. You will pay taxes on $63,500, regular tax rate. Are you absolutely sure that the Surrender value is $70,000? What is the face amount of the policy?

Be sure you look at the surrender value and not the cash value. The CV is what is in the account and the Surrender Value is what you will receive when you cancel the policy. Look at your policy under the heading of Surrender Value.

Answer 4

Sorry, it isn't going to be a return of premium if it is a whole life policy. If the premium is $250 and is for 26 years, you paid in about $6500. I'd suggest borrowing the cash value to pay on the house. Then, there is no tax on the money. You will keep the policy in force by paying the cost of insurance each year. The policy you have at work is term insurance and goes away if you ever leave there. The whole life builds value and is yours. As you grow older, insurance will become harder to get and the prices rise dramatically. You have the advantage in the policy of borrowing at a very low rate and still earning interest on the amount you borrow. If you die, the benefit will be reduced by the loan amount, but will be tax free to the beneficiary.  If you indeed decide to take the case out, you will taxed on the gain at a minimum of 20%. Makes borrowing the value even smarter.