How To Minimize Taxes When Cashing In Whole Life Insurance

None of us likes to pay taxes but they are a necessary part of any financial calculation. This is especially true if you’re considering selling your life insurance policy and looking to receive the cash surrender value. That’s because there might be other options for you to maximize what you receive.

When You Have To Pay Tax On Your Whole Life Insurance

The great news is that a beneficiary of life insurance doesn’t have to pay taxes on the death benefits. Considering a death benefit can go into the millions then that’s a huge advantage. Nevertheless, you can use a life insurance policy to your advantage. Although some options are taxed, as described below:

9679. Any interest or investment gains from your cash value
9680. Receiving cash surrender value above your policy’s premium payments
9681. As a beneficiary if you receive interest

Any Interest Or Investment Gains From Your Cash Value

You can withdraw the cash value that sits in your permanent life insurance policy. Essentially, when you contribute premium payments, they either build up a cash value or cover the cost to insure you as well as any policy fees. The best part of such life insurance policies is that your cash value builds up over time without incurring any taxes. However, once you withdraw any of the cash value, you can expect to pay taxes on any interest or other gains you receive from it.

Receiving Cash Surrender Value Above Your Policy’s Premium Payments

If you decide to sell your life insurance policy, otherwise known as a life settlement, then you’ll get a cash surrender value. In that case, you’ll pay tax on anything above your premium payments.

As A Beneficiary If You Receive Interest

Let’s not forget that you might be receiving death benefits from someone else’s life insurance policy. Of course, that’s not you cashing in on a whole life insurance but it’s still worth noting. That’s because you can choose to get the payment in one lump sum or as a series of payments over time. You are not taxed on a lump sum death benefit. However, any interest paid to you because of the time delay will be taxed.

When You Don’t Have To Pay Tax On Your Whole Life Insurance

Luckily, it’s not all bad news when dealing with taxes on your whole life insurance. In fact, there are some scenarios that will reduce your tax bills as detailed below:

9679. Withdraw money from cash value that comes from your premium payments
9680. Take out a loan on your cash value
9681. Sell your life insurance policy for medical bills
9682. Cash surrender value is tax-free up to the dollar amount of premium payments

Withdraw Money From Cash Value That Comes From Your Premium Payments

When you withdraw money from your cash value, simply make sure that you don’t go above the amount that came from your premium payments. That way, you won’t pay any tax.

Take Out A Loan On Your Cash Value

In terms of taking out a loan, you just have to make sure that your whole life insurance is still in force in order to avoid paying taxes. Make sure you pay everything back before the end of the policy though. Otherwise, you might get a tax bill.

The best way to avoid taxes completely is to first, withdraw the cash value that’s up to your premium payments.  Then, you take out a loan against the rest of the amount. Of course, that assumes you can repay within a reasonable time frame. If not, you might face a tax bill on any interest you earn.

Sell Your Life Insurance Policy For Medical Bills

Life has a way of taking us by surprise. That could mean that you now find yourself facing medical bills for a terminal illness. If you sell your life insurance policy to pay those special medical bills then you don’t get taxed. This is a viatical settlement.

Cash Surrender Value Is Tax-free Up To The Dollar Amount Of Premium Payments

Essentially, anything that’s covered by your premium payments doesn’t get taxed including your cash surrender value if you surrender the value of your life insurance policy. Then of course, you can also sell your policy but only if it’s a whole or permanent life insurance policy and not a term life insurance policy. If you have a term life insurance policy then you’ll have to first convert it according to your insurance company’s specific requirements.

Final Thoughts On Minimizing Taxes Before A Life Settlement And A Cash Surrender Value

In summary, the cash value of your life insurance policy that comes from your premium payments isn’t taxed. You can use this to your advantage by withdrawing that amount. Then, you simply take out a loan on the rest to minimize your taxes. Either way, you’ll want to talk to your insurer. Together, you can review the specific details of your cash value and policy terms. Nevertheless, there are options to make your life insurance policy work for you during your lifetime. Naturally, your insurer or life settlement expert can advise you on your specific case.