Life Insurance Taxation Nuances

Policy Surrender Strategy

We all know Benjamin Franklin’s famous words, “In this world nothing can be said to be certain, except death and taxes.”  While this statement remains true, tax laws continue to flux, evolving the amount of income, capital gains, estate, state-level, property, etc. taxes that are due each year.  While the 2025 tax law did not have a drastic effect on the insurance industry as a whole, there are some tax-related nuances to consider when adding insurance products to a financial portfolio or when auditing existing policies.

Exiting a life insurance policy should be a carefully considered part of financial planning, since surrendering a policy can incur income taxes on any gains on the surrender cash value received by the policy owner.  If a Whole Life policy is surrendered with Paid Up Additions, basis can be decreased, and more taxes might be due.  When a permanent policy is surrendered, any outstanding loans are immediately taxable at ordinary income tax rates to the extent there is gain in the policy above basis, even if the policy loan was taken years or decades in the past.

There are a few exit strategies to consider before simply surrendering a policy.  For our older clients, we recommend exploring a life settlement. We are proud to partner with Welcome Funds to navigate the life settlement market and get the best offer for our clients.  Welcome Funds has thoroughly outlined taxation nuances of a life settlement on their website.  Read more about the IRS Tax Treatment of Life Settlements. When weighed against the taxation of a policy surrender, these scenarios might be more advantageous for some clients.

Contact us with any questions or opportunities to help you or your clients achieve identified goals. This is what we enjoy doing for only a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.