Whole life insurance provides various tax benefits. But not everybody enjoys or would like to retain their whole life insurance plan. If you need to cash in your whole life policy, you ought to be aware that we have several possible tax ramifications connected with surrendering the coverage to show to you. These tax ramifications might leave you with a tax liability that you will have to pay for whenever you file your tax return.
Accumulation of Cash Value
Cash value in your whole life policy builds up from the death benefit as a sort of cash pool. This pool serves to reduce the “net amount at-risk” to the life insurance firm. The “net amount at-risk” is the difference in amount between the cash value and the death benefit. Since the cash value represents cash that really exists, the danger is that the amount of cash the firm is going to have to come up with should you perish before the contract matures and the net amount at-risk attained will be zero dollars.
How Dividends are Treated
Dividends are put into some whole life policies to accentuate the cash value of the coverage. These dividends are normally exempt from tax in the event the coverage is maintained in force. Such returns are also frequently used to buy paid-up additional insurance. And should you cash in your dividends, you’ll receive them tax-free up to your basis (the quantity of premium you’ve paid to the coverage).
Surrendering the Whole Life Policy to the Insurance Carrier
A surrender of whole life insurance policies is actually the technical phrase for “cashing in” your coverage. Surrendering the policy ends the policy and enables one to “cash in” and obtain the cash value of the insurance policy that’s accessible at the time of surrender. But should you surrender the entire whole life policy, you could encounter a tax liability. Surrendering the whole plan requires you to contact the insurance provider that you bought your life insurance plan from and let them know that you desire to terminate the plan. Depending upon the firm, you might be required to complete an application indicating why you want to surrender the plan.
Calculating Tax Liability for Your Policy
The gain in the whole life insurance plan represents your tax liability. Any money amount over the premiums you’ve paid for the plan is taxable as regular earnings and has to be documented in your tax return in the season you surrendered your plan.
Points to Consider
Before cashing in your whole life insurance plan, you ought to consider whether or not you actually need it. Life insurance cash values might generate for you a considerable gain for those who have kept their coverage for a considerable period of time. Consequently, you can get the cash held within the policy via policy loans and possibly prevent any tax liability provided that the policy stays in force.