Insurance taxation on surrender

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Jul 23, 2010 12:45 pm

If someone surrenders a whole life insurance policy and the cash value is 70K and the premiums paid in are 40K, does that mean that the 30K is actually taxed at ordinary income?

Also if this situation presented itself are there any strategies that can be used if the client is simply concerned that they do not need the Life Insurance, they could use the cash and they are sick of paying premiums?

Jul 23, 2010 6:51 pm

That would be the case, but I have never heard of a whole life with that situation.

Jul 25, 2010 11:00 am

I would see when the policy becomes "paid up". At that point, they do not need to pay premiums..............or they could simply stop paying and let the policy eat itself over time.

Clients can always "use the cash". The question is whether or not they "need the protection". Not always a good idea to surrender a policy unless you are sure they do not need it and can self-insure. If thats not the case, I would use some of the cash to buy a term policy (assuming they are still insurable).

Jul 25, 2010 11:56 pm

You could also drop the death benefit to the min non-mec level and let the cash value carry the policy for a while.  Be careful surrendering policies.  You'll end up with some angry would-be beneficiaries.

Jul 26, 2010 6:17 pm

Thanks for the advice on those two things.

Jul 29, 2010 1:01 pm

[quote=IndyBDguy]

You could also drop the death benefit to the min non-mec level and let the cash value carry the policy for a while.  Be careful surrendering policies.  You'll end up with some angry would-be beneficiaries.

[/quote]

Be careful? Yeah, that is an interesting area with insurance going forward. 1035 exchanges and policy terminations could fuel an entire legal career. The complicated VA products over the last 10 yrs, have all sorts of pitfalls regarding broker and/or policy holder behavior. This has lead me to believe that VA biz is "unsafe at any speed". Cash value insurance, I'm seeing more and more of the dark side too. About the only thing I'll do is term and 7 yrs paid/guaranteed up in full.

I've unfortunately found that insurance as a whole, is the most misrepresented and witholding of material information of every other product area COMBINED. 

Jul 30, 2010 8:26 pm

"I've unfortunately found that insurance as a whole, is the most
misrepresented and witholding of material information of every other
product area COMBINED."

VUL's will get a lot of heat in the next few years.  I see too many reps allowing clients to underfund VUL, then they wonder why it doesn't perform.  I suppose that's because their commission is based on target premium, and only a small bump for excess prem.