Tax liability for senior cashing in insurance policy?
What kind of tax liability would my father have for cashing in a 15k life insurance policy? He’s 75, has a modest pension and investments, and collects social security. Are there any options he should consider in terms of when he cashes this in? We checked with the company and its just a matter of filling out a form to get the proceeds of the policy, so the main issue remaining is are there any tax angles to consider. Thanks!
Glenda
January 11th, 2009 at 9:23 PM
Annie
It depends on what his basis (what he paid in to the insurance) is and what he is getting out of it. Assuming this is NOT an annuity, if he gets out more than he paid in, the difference is taxable.
Helen, EA in PA
January 12th, 2009 at 12:32 PM
Catherine
In most cases he is only taxed for the amount of the distribution that is greater than what he paid in over the life of the policy. If that is the case the taxable portion of the distribution is added to his ordinary income an taxed at his marginal rate.