When people cancel policies either for cash surrender or as part of a 1035 exchange, they sometimes receive a 1099-INT from the life insurance company come tax filing time the following year. Whole life policies pay a guaranteed fixed rate of return on your money, while variable policies invest your money in the stock market. The cash surrender value of life insurance is the amount an insurance company will pay you as a when you surrender or voluntarily terminate your policy before it reaches its maturity or before the events covered in the policy occurs.. Look. While your premiums are returned tax-free, your investment gains are taxable. If you die after ending the policy, your heirs won't receive a death benefit. The good news is that most life insurance companies keep a tally of your cost basis and make it readily available to you. Think of your life insurance policy like a savings account. Because the insurance company held onto your money longer than allowed by state law, it owes you interest on the money. He graduated with a Bachelor of Science in economics from McGill University. The insurance company already sent this money to the IRS, so it counts as part of the money you paid in advance of calculating your taxes due. Whatever is left over is taxable. If you want to take out your cash value, you can take out a loan instead of surrendering your policy. By surrendering your policy, you take out all your money at once, so you must pay tax on your gains immediately. The key difference is that you were never in receipt of the funds. This can be a problem if your health has worsened since you bought the original policy. The 1099-R you receive should look like this: If you own a Modified Endowment Contract (MEC), you cannot take a FIFO withdrawal against the basis. lic Policy lapse: If You discontinued paying the premium within 3 years then you will lose your money. Life insurance comes in different flavors and shapes -- and some of them are taxable. Generally speaking, the older a policy is and the longer it has been active, the higher the cash value will be. It's important to understand that 1099-R reports distributions regardless of taxability. Generally 30 days after the Premium due date. It's wise to take note of this if you fall into this sort of timeline to ensure you have appropriate records. The life insurance company will calculate this value, known as the cash surrender value or the non-forfeiture value. This is very similar to receiving a 1099-R when taking a cost basis withdrawal or loan from a life insurance policy. The 1099-R will not report any adjustments made to the premiums you paid for the purpose of computing your cost basis. You can only cash surrender permanent life insurance policies, as they are the only policies that build cash value. Your question suggested that your mother is still alive and that you or she intend to "surrender" the policy. This means that there will not be any tax on the amount you have received which is up to the sum of the premiums you have paid. You request a full surrender of the policy. Your beneficiaries may have to deal with income tax on the benefits, and in some cases, so will you. When you surrender your life insurance policy, you get your premium payments back tax-free because you funded your life insurance with after-tax money, and the IRS doesn't double-tax your contributions. Here's a blank 1099-R to show you the specific boxes: If you surrender a life insurance policy or non-qualified annuity for its cash surrender value, the insurance company will calculate the taxable distribution for you. A common type of disposition is the cancellation or surrender of a policy. Insurance Calculator. You decide to withdraw $150,000 from the policy. 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