Asked by bmm123  |  Submitted February 18, 2016

Are loans from my life insurance taxable as income?

Also if I cash in my current life insurance policy, is that amount taxable if I have paid the premium?

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  Answers  |  7

February 18, 2016

No they are not so long as you don't exceed premiums paid into the policy.

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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February 18, 2016

No loans made against your life insurance is not taxable. Only taxed if you don't pay it back.

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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February 23, 2016

You have tax free loans, they are tax free as long as your policy doesn't lapse out. we use cash value for tax free retirement all the time. what you do at the time is look at the policy get an in force ledger with a sample of loans coming out and make sure the policy stays in force to at leas 95 depending on your family history. if the policy does lapse after taking out loan. there is tax free loan up to you cost basis after that it would be ordinary income tax on it. I hope this helps

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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February 23, 2016

Loans are tax free as long as the policy is not a modified endowment contract (MEC) AND the policy is not surrendered or lapsed.

If the policy is surrendered or lapsed the amount of loan above your cost basis (essentially your premiums paid) would be taxable as income in the tax year the policy lapses.

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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February 23, 2016

Two part question, two part answer.

Part One, No, as long as 1) it is a non-MEC. I'll define non-MEC if needed. Your original policy illustration probably identifies it as either a MEC or non-MEC 2) You keep the policy until your demise. Often forgotten, you can withdraw an amount equal to the premiums you have paid thereby not incurring a loan. Remember that both loans and withdrawals will reduce the amount of life insurance and may have other negative effects on your policy.

Part Two - If you cash in (surrender) your policy with an outstanding loan and have made no withdrawals other than the loan, only the amount of the loan that exceeds the total premiums you have paid is taxable.

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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February 23, 2016

The answer is yes to whatever amount of cash is above your cost basis.( i.e. if you have a cash value of $100,000 and a cost basis of $80,000 then $20,000 of that would be taxable gain in the tax year you surrendered or cashed in the policy.) Feel free to email me directly with any further questions.

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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February 23, 2016

Usually the answer is no, a loan is not taxable income. There are some exceptions which I will note. One of the advantages of cash value insurance is the ability to borrow and not have it effect your current income. I know this because I have used my cash values several times over the years without tax issues arising.

The two exceptions would be if you created a Modified Endowment Contract (MEC 1988) in which you over funded your life insurance (too much money too fast) and turned it into something similar to an IRA for withdrawals.

The other situation would be if you surrender or allow your policy to lapse. At that point all earning above your cost to have the policy or what paid up additions you had, would be subject to capital gains taxes.

$commenter.renderDisplayableName() | 05.30.17 @ 09:13

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