If I cash in my insurance policy, will I be hit with taxes?

Dear Nancy,

I have a small "whole life" policy which I am paying $118 per month for more than 20 years. In the meantime, I also borrowed from the policy so the net cash value of the policy is about $9,000 if I surrender the policy.

I tried to ask the insurance company, but could not get a straight answer. My question is: If I cash my policy, as I don't need it anymore, would there be any tax implication on the interest accumulated inside the policy throughout the years?

Hope you can help.

Thanks, Robert

Dear Robert,

There is likely a tax implication to surrender, but your insurance company will need to confirm that.

You need to ask their client services area:

1) If I surrender my policy today, how much money will I get from the policy after the loan is paid off?

2) How much will I have to report for tax purposes?

Because there is a loan against the policy, it's possible you could have to report more than you get returned in cash. I'm sorry I can't give you an exact answer as to the taxable portion of the surrender. Unfortunately, this needs to be calculated by the insurance company for each policy.

Ultimately you should go to the broker that sold you the policy for the answers. They are getting an ongoing sales trailer from the initial sale, and they are somewhat obligated to provide you with any applicable servicing. It would also be a good idea to discuss the tax implications with your tax specialist.

I hope this helps.

Nancy

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Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com

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