Cash out Life insurance and Taxes

[scagnt83]

This is likely not true. My guess is you think the original base policy death benefit is all that would be paid at death. If dividends have been either buying paid up insurance each year or accumulating at interest, that added amount will also be part of the death benefit.

Ask them to either change dividend to pay premium or have them elect a reduced paid up policy. (Assumimg no current loans on the policy)

Its most likely the way the statements look. As you probably know more than most around here, sometimes those old policies break out the values and show the Base DB, then the PUA DB, Policy Value, and even PUA CV... all separate.

Very hard for a consumer to navigate and understand without reading the fine print.

Our industry has improved annual statements a lot over the past 20 years as products developed.

 

[scagnt83]

If you think the cash value is greater than the db, you don't know what you have.

100% true.

 

[PrivClientSG]

I have 2 whole life insurance policies. Both have cash value associated with them. I am thinking about cashing them out.

Policy 1 has a cash value of $22,000 with a cost basis about 52,000. I know if I cash this one out I will not have to pay any income tax.

Policy 2 has a cash value of $90,000 with a cost basis of $58,000. If I cash this one out I would owe tax on the gain $32,000.

The question is, if I cash both out in the same year, my cost basis on both policies is about $110,000 and my cash out total is $112,000. Can I use one to offset the other on taxes or is each policy taxed separately?
TIA

No, you cannot "offset" the "gain" in one policy, against the "loss" in the other. Technically, you can as you can report it and memorialize this on your tax return however you want, but if get audited, you will lose the audit.

However, you go on to say, "The smaller policy has increasing premiums that do not justify the benefit." -- so this is not a whole life policy? Unless it is a "graded" premium product, which these days are few a far between. So, if either or both of these policies are not truly whole life insurance, that may open the door to other discussions. Your reasons for "cashing them in" seem myopic. You should seek professional, expert advice. Good luck!

 

[retiredandbusy]

Allen Trent,

You are correct. I was going from memory, the smaller policy (Metropolitan Life Insurance Company Group Variable Universal Life) that has the increasing premium was paid by my employer until retirement. During my employment I was allowed to increase the death benefit amount by paying the premium difference and also add a higher amount to build cash value.

Beginning at age 71 the premiums began to increase due to age.

The original question about taxes has been answered (no they cannot offset). I plan to cash out the smaller policy and keep the larger one.

Not sure why you used the myopic reference.

Brad

 

[Allen Trent]

Allen Trent,

You are correct. I was going from memory, the smaller policy (Metropolitan Life Insurance Company Group Variable Universal Life) that has the increasing premium was paid by my employer until retirement. During my employment I was allowed to increase the death benefit amount by paying the premium difference and also add a higher amount to build cash value.

Beginning at age 71 the premiums began to increase due to age.

The original question about taxes has been answered (no they cannot offset). I plan to cash out the smaller policy and keep the larger one.

Not sure why you used the myopic reference.

Brad

Not sure, I don't recall saying that. Myopic isn't a word in my vocabulary.

 

[The Benefit Coach]

Allen Trent,

You are correct. I was going from memory, the smaller policy (Metropolitan Life Insurance Company Group Variable Universal Life) that has the increasing premium was paid by my employer until retirement. During my employment I was allowed to increase the death benefit amount by paying the premium difference and also add a higher amount to build cash value.

Beginning at age 71 the premiums began to increase due to age.

The original question about taxes has been answered (no they cannot offset). I plan to cash out the smaller policy and keep the larger one.

Not sure why you used the myopic reference.

Brad

The other alternative that I haven't seen mentioned is the possibility of selling the smaller policy in a life settlement deal. There's not nearly enough information here to say if it's even feasible or not, but if the face amount is at least $100k, it might be something that should at least be looked at.