Is a monetary withdrawal from Whole Life taxable?

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Is a monetary withdrawal from Whole Life taxable?

Postby Dulocracy » Wed Jun 26, 2013 1:41 pm

My wife's parents were sold a whole life policy with the idea that it would pay for her college. It did. They recently gave it to us. We can either keep paying on it or we can take the cash value (around $8,000). We have decided to cash it out instead of paying on a whole life policy with a loan against it (about which I have read here). The form to cash in the policy indicates that it is a taxable event. The policy was in her name, but they paid for it. My questions are:

1) Is it a taxable event for my wife to take the money out of the life insurance policy?

2) Do I need to be worried about back taxes owed on money she used for college?
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby kaneohe » Wed Jun 26, 2013 6:45 pm

you should check w/ the insurance company to be sure............
http://www.investopedia.com/articles/pf/08/life-insurance-cash-in.asp

but it sounds like from the linked article that you would pay tax on the amount of
the cash taken out less the basis (amount paid in for premiums) so if you take out
8K (after the amount of the loan has been netted out), you would have to add the amount of the loan to 8K
and then subtract out the basis to find your taxable income from the insurance.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby dhodson » Wed Jun 26, 2013 7:50 pm

as noted above, all gains (including the loan) are taxed as income so yes money used for college will be taxed if it is a gain. If you do the math, you will notice the return was horrible but of course you cant change that. Just don't purchase another one.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby mephistophles » Wed Jun 26, 2013 8:09 pm

Dulocracy wrote:My wife's parents were sold a whole life policy with the idea that it would pay for her college. It did. They recently gave it to us. We can either keep paying on it or we can take the cash value (around $8,000). We have decided to cash it out instead of paying on a whole life policy with a loan against it (about which I have read here). The form to cash in the policy indicates that it is a taxable event. The policy was in her name, but they paid for it. My questions are:

1) Is it a taxable event for my wife to take the money out of the life insurance policy?

2) Do I need to be worried about back taxes owed on money she used for college?


Any tax on gains would be to the owner of the policy, not the insured.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby dhodson » Thu Jun 27, 2013 8:44 am

yes but she is now the policy owner

the parents were kind enough to give them this tax liability
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby Frugal Al » Thu Jun 27, 2013 9:39 am

Dulocracy wrote:2) Do I need to be worried about back taxes owed on money she used for college?

For clarification, you would not owe "back taxes"--the definition of back taxes being a tax liability not paid in the year in which it is due. At the time your wife was in college the proceeds consisted of a legitimate policy loan on a viable life insurance policy. Taxes are incurred to the policy owner once that policy terminates for reasons other than death of the insured, to the extent the proceeds exceed the cost basis. Taxes would be due for the filing year in which the policy is terminated, and be considered a current tax liability.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby Dulocracy » Thu Jun 27, 2013 10:22 am

:shock:
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby mephistophles » Thu Jun 27, 2013 6:00 pm

Some policies on children automatically change ownership upon majority. Others do not. Children receiving policies as a gift need to determine what is the case on their policies.
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Re: Is a monetary withdrawal from Whole Life taxable?

Postby Dulocracy » Mon Jul 01, 2013 4:23 pm

Unfortunately, this one is in her name. Thanks all for the replies!
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Dulocracy
 
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Location: Atlanta, GA


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