Surrendering a Whole Life Insurance Policy

Purchasing a whole life insurance policy is one of the best moves you can make. It provides never ending, lifetime support and pays out money to your beneficiaries upon your death. A whole life insurance policy has two parts: the cash value and a lump sum. Your premium payment covers both accounts. If you are having financial difficulty in your senior years, you might believe that it is OK to stop paying your life insurance premium. However, if you stop paying a premium, your policy could terminate and you will lose the money, both the cash value and the death benefit. Few people understand the tax consequences of surrendering the whole life insurance policy. There are surrender fees if you decide to cancel your life insurance policy.

A whole life insurance policy contains the cash value account. If you decide to give up your policy, you will get your cash value back from the insurance company. However, if the amount of money you get back is greater than your death benefit amount, you will have to pay taxes on the excess income. If the amount you receive is less then your death benefit, you will not have to worry about paying any taxes on it. Of course, you will not receive any compensation for the death benefit.

Permanent life insurance policies are transferable. That means you can sell it to a third party. If you do sell it to a third party, the IRS might consider it capital gains and tax it as such. There is one clause: you must be terminally ill and have a letter from your doctor stating that you will die within 24 months. The IRS does allow people to exchange insurance policies. You can exchange your policy without penalty for a different insurance policy and it will be tax-free. The only type of insurance you cannot exchange tax-free is a single life insurance policy for a survivorship insurance policy. Of course, you can gift your policy. Many people will gift their policies to a trust or another family member. It would not be "gift taxed" if the policy were transferred to a spouse.

You may also donate your whole Life insurance policy to a nonprofit organization. The policy value has to be determined by the insurance company first. You also have to hold the insurance policy for at least one year. The original owner of the policy can continue to make payments, and the payments will qualify as a charitable gift. However, not all states allow insurance policyholders to donate their policies to a charity, so you will need to talk to an attorney.

If you are thinking of surrendering a whole life policy, talk to a professional, because tax laws change often. A life insurance policy should cover you for life, which means that it is in your best interest to keep the policy forever. The purpose of a whole life insurance policy is to protect you and your family from financial ruin. If you intend to give up your policy through sale, cancellation or gifting, you may be able to evade taxes under certain circumstances, but this is no guarantee. The best course of action is to hold onto your policy and continue to make payments on time. In the meantime, talk to a tax professional about your options.

If you do not yet have a life insurance policy, or are thinking about switching, fill out information on this website to get free quotes. Compare the different policies by their rates and features.