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Dec 15, 2017 by |

Alameda County and California Life Insurance Attorney: Taxes on Surrenders

ATTORNEY NEWSLETTER

Tax Consequences of Surrenders

Every year a sizeable percentage of cash value life insurance policies are surrendered by policyholders. Those surrenders may have tax consequences.  We represent policyholders who suffer tax losses as a result of surrenders and/or replacements they are talked into by agents and advisors.[1]  If you or a loved one suffered a tax loss on a surrender or paid surrender charges on a full or partial surrender, or other fees under a surrendered life insurance policy, call the Alameda County and California life insurance attorneys at Evans Law Firm today at (415)441-8669 and we can review your policy and surrender circumstances for free.  We handle life insurance, annuity, and financial elder abuse cases in Alameda County and throughout California.  A list of major annuity and life insurance providers in California appears below.

Through its Revenue Rulings, the Internal Revenue Service (IRS) provides guidance as to the tax treatment of various transactions, including surrenders or sales of life insurance policies. In Revenue Rulings 2009-13 and 2009-14, the IRS provided some guidance as to the taxation of certain surrenders and sales of life policies:

  • Upon the surrender of a cash value life insurance policy, the amount received is ordinary income to the extent it exceeds the cumulative premiums paid.
  • If a cash value policy is sold  to a third party, there is ordinary income to the extent that the cash value exceeds premiums paid with the balance of the gain treated as capital gain.
  • The total gain on the sale of a cash value policy (ordinary gain and capital gain) is determined by using as basis the total of premiums paid less the cost of insurance. (The IRS does not provide a “safe harbor” method for calculating the cost of insurance. You will need to ask the issuer what the cost of insurance is for the policy you own.)
  • On the sale of a term policy, basis is the unearned premium and the entire gain is capital gain.

As you can see, the IRS tax treatment rules are complicated. Always consult your tax advisor when considering any surrender, sale or replacement of a life insurance policy or an annuity. Do not let yourself be talked into a surrender or sale until you have fully covered the tax consequences of the proposed transaction with your own tax professional.  Do not act solely on the advice of an agent or financial advisor regarding the tax consequences.  If you are provided with illustrations by your agent, be sure to review those carefully with a tax professional.

Contact Us

If you have suffered a tax loss or surrender charges on the full or partial surrender of a life insurance policy, contact Alameda County and California life insurance and annuity attorney Ingrid Evans at the Evans Law Firm for a free review of your policy and surrender terms at (415) 441-8669, or by email at <a href=”mailto:info@evanslaw.com”>info@evanslaw.com</a>. Our attorneys have experience with complex indexed universal and whole life policies and annuity contracts and cases against large insurance companies. We can help guide your case through a jury trial or toward an equitable settlement.  We also handle cases involving physical and financial elder abuse, nursing home abuse, whole life insurance and universal life insurance, and indexed, variable, and fixed annuities.

Some of the major annuity and life insurance providers in California are:

Allianz Life Insurance Company of North America

Allstate Life Insurance Company

American Equity Investment Life Holding Company

American National Insurance Company

Athene Annuity and Life Company

AXA Equitable Life Insurance Company

EquiTrust Life Insurance Company

Fidelity & Guaranty Life Insurance Company

Guggenheim Partners/First Security Benefit Life Insurance Company

Forethought Life Insurance Company

Genworth Life Insurance Company

ING USA Annuity and Life Insurance Company

Jackson National Life Insurance Company

John Hancock Life Insurance Company

Lincoln Financial Group/The Lincoln National Life Insurance Company

MassMutual/Massachusetts Life Insurance Company

MetLife/Metropolitan Life Insurance Company

Midland National Life Insurance Company

Mutual of Omaha

New York Life Insurance Company

Pacific Life Insurance Company

Prudential Life Insurance Company

Guggenheim Partners/Security Benefit Life Insurance Company

Transamerica Life Insurance Company

Voya/Reliastar Life Insurance Company

[1] The California life insurance attorneys at Evans Law Firm Inc. are not tax lawyers and do not give tax advice. 

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