Calculating the ACB of a Life Insurance Policy

What Is the Accumulated Cost Basis?

The Accumulated Cost Basis (ACB) represents the total amount of premiums paid into a life insurance policy, adjusted for any refunds, bonuses, or policy loans. It is the figure used to compute taxable gains when the policy is surrendered or when a death benefit is paid out to a beneficiary.

Key Components of ACB Calculation

• Premiums Paid: All cash premiums contributed over the policy's lifetime.
• Refunds and Surrender Charges: Cash returned to the policyholder reduces the ACB.
• Policy Loans and Interest: Loans against the policy's cash value lower the ACB; interest paid does not affect it.
• Bonuses and Dividends: Certain policies add accrued bonuses to the ACB.

Step‑by‑Step Calculation

1. Start with the Total Premiums Paid: Sum every premium payment made.

2. Subtract All Refunds and Surrender Charges: Remove any amounts returned to the policyholder.

3. Deduct Outstanding Policy Loans: Subtract the current loan balance, but not the interest.

4. Add Accrued Bonuses (if applicable): Include any bonuses that are added to the policy's cash value.

5. The resulting figure is the policy's ACB.

Illustrative Example

Assume a policy with the following figures:

ACB = 15,000 – 1,200 – 3,000 + 800 = 11,600.

Why Accurate ACB Matters

Tax authorities use the ACB to determine taxable gains when a policy is surrendered or when the death benefit is paid. An over‑estimated ACB reduces taxable income, while an under‑estimated ACB can trigger unnecessary tax liability.

Tools and Resources

Most insurance carriers provide a policy statement that lists premiums, refunds, loans, and bonuses. Spreadsheet templates can automate the calculation by pulling these values into a single formula. For complex policies, consulting a tax professional or financial advisor ensures compliance with current tax regulations.