09 Feb Is money taken from a life insurance policy taxable?

Q. My wife cashed in an insurance policy that was in her name. She is 74. Do we have to claim it as income?
— Concerned

A. Thanks for your question.

When a life insurance policy is cashed in, it triggers a potentially taxable event, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

He said there are calculations done by the insurance company and a portion of the proceeds is usually taxable.

If you have a policy with a cash value that earns interest, it’s common for the amount above your basis to be taxable.

“Our advice is always to check with the insurance company before cashing in a policy and ask for the amount that would be taxable upon termination,” he said.

Alternatively, if you borrow against a policy, the loan is not currently taxable, Karu said. But there could be some future tax considerations if the policy is terminated before death, he said.

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This story was originally published on Feb. 9, 2021.

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