My grandfather had a life insurance policy for me since I was a baby. He was paying the premium on it. He died. The estate is transferring the life insurance policy to me. I can continue paying the premium or cash it. What will be the tax treatment if I cash it?

When you cash out a life insurance policy, the tax treatment depends on the policy's cash surrender value and the total premiums paid. Here's how it generally works: 1. **Cost Basis**: Your cost basis in the policy is typically the total amount of premiums paid into the policy. Since your grandfather was paying the premiums, the cost basis would be the sum of all premiums he paid. 2. **Cash Surrender Value**: This is the amount you receive if you decide to cash out the policy. 3. **Taxable Amount**: If the cash surrender value exceeds the cost basis (total premiums paid), the excess is considered taxable income. This taxable portion is treated as ordinary income, not capital gains. 4. **Reporting**: The insurance company will issue a Form 1099-R showing the taxable amount, which you must report on your tax return. 5. **Estate Considerations**: Since the policy was transferred to you from your grandfather's estate, ensure that the transfer was handled correctly to avoid any potential estate tax issues. However, life insurance proceeds are generally not subject to income tax when received as a death benefit, but this does not apply when cashing out the policy. Before making a decision, consider consulting with a tax advisor to evaluate your specific situation and any potential tax implications.

Get Started

Get your tax questions answered