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?
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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