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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My wife has a whole life insurance policy. It had and initial

Resolved Question:

My wife has a whole life insurance policy. It had and initial 'face value' of $50,000   We paid prermiums for a while and then decided to 'borrow' to pay the premiums. The total death benefit is $130,830. We owe $96,410.40 at 8%. The cash value is $99,591.95 less the loan is a net of $3,181.55.

She is 80 years old, and we have no need for this policy. We want to cancel. The insurance company says the amount of the loan would be reported as income to the IRS. We live on Social Security and income from a Reverse Mortgage. The income taxes on this amount would be practically impossible since it would cause our bankruptcy.

We find that we are 'damned if we do and damned if we don't. Paying the premiums or the taxes they say would be involved, are both not doable let alone acceptible. I the information from the insurance co. accurate? Is there any alternative that would not result in taxable income? Any help will be appreciated. Thank you.
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello Philly,

A whole life insurance policy is basically treated no different than any other type of investment such as an appreciated stock or bond or CD. If you receive more money than what you contributed to the policy, you have a gain that is taxable.

The taxable portion of a whole life policy is the proceeds that you receive less the amount of your contributions. Whatever funds you contributed as premiums for this policy would be deductible from your net proceeds, and that is the portion that is subject to tax. So the full loan balance may not be taxable. It would only be the excess of the policy cash value over the amount of your contributions.

Unfortunately there are no ways to avoid making this taxable income if you surrender the policy at this time.

Thank you Philly and let me know if you have more questions. I am happy to help you with whatever I can.

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