Is Cashing In a Life Insurance Policy Taxable?

Cashing in a life insurance policy is generally tax‑free up to the amount of premiums you have paid (your basis). Any amount received that exceeds your basis is considered taxable income and must be reported on your tax return.

Understanding the Basis and Cash Value

Your basis is the total of all premiums you have paid into the policy, minus any dividends that were used to reduce premiums. The cash value is the amount the insurer will pay you if you surrender the policy before death. The portion of the cash value that is equal to or less than your basis is not taxable.

When Taxes Apply

If the surrender value exceeds your basis, the excess is treated as ordinary income. This includes any accrued interest or investment gains within the policy. The taxable amount is reported on Form 1040, line 13b, as "Other Income."

Exceptions and Special Situations

Some policies offer a tax‑free rollover if you transfer the cash value to another qualified life insurance contract within 60 days. Additionally, if you are over age 59½, you may avoid the 10% early‑withdrawal penalty that applies to other retirement accounts, though ordinary income tax still applies to gains.

Impact of Policy Type

Whole life and universal life policies accumulate cash value and are subject to the same tax rules. Variable life policies, which invest in separate accounts, follow the same principle but may have additional reporting requirements for investment earnings.

Simple Tax Comparison Table