Questions to Consider
Consider Your Options
Of course, you can always surrender the old policy. But, if there’s any gain in the policy, you’ll need to include that amount in your gross income on your tax return. There it will be taxed as ordinary income. Gain is generally determined by subtracting the total premiums you’ve paid (your cost basis) from the policy’s current cash value.
Even if there’s no gain in the policy, there may still be a good reason not to surrender it. If you’ve paid more into the policy than its current cash value, you’d be walking away with a loss that you can’t claim on your tax return. Exchanging a policy that’s “underwater” (i.e., its cash value is less than the total premiums paid for it) for a nonqualified (NQ) annuity can:
A life insurance policy might be underwater for a variety of reasons. One reason might be lower-than-expected interest rates on whole life or universal life policies. Another reason might be lower-than-expected subaccount values in variable life policies.
In next blogpost we will discuss life insurance to annuity exchange.
- Do you have an old cash-value life insurance policy that has served its purpose?
- Would a protected retirement income stream – one you cannot outlive, regardless of market conditions – now better address your needs?
- Do you know you can exchange that old policy – generally tax free – for an immediate or deferred annuity?
Consider Your Options
Of course, you can always surrender the old policy. But, if there’s any gain in the policy, you’ll need to include that amount in your gross income on your tax return. There it will be taxed as ordinary income. Gain is generally determined by subtracting the total premiums you’ve paid (your cost basis) from the policy’s current cash value.
Even if there’s no gain in the policy, there may still be a good reason not to surrender it. If you’ve paid more into the policy than its current cash value, you’d be walking away with a loss that you can’t claim on your tax return. Exchanging a policy that’s “underwater” (i.e., its cash value is less than the total premiums paid for it) for a nonqualified (NQ) annuity can:
- Preserve the cost basis and thereby
- Allow it to be recovered tax free from the annuity payouts
A life insurance policy might be underwater for a variety of reasons. One reason might be lower-than-expected interest rates on whole life or universal life policies. Another reason might be lower-than-expected subaccount values in variable life policies.
In next blogpost we will discuss life insurance to annuity exchange.
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