Is a monetary withdrawal from Whole Life taxable?
Is a monetary withdrawal from Whole Life taxable?
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?
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.
Re: Is a monetary withdrawal from Whole Life taxable?
you should check w/ the insurance company to be sure............
http://www.investopedia.com/articles/pf ... ash-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.
http://www.investopedia.com/articles/pf ... ash-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.
Re: Is a monetary withdrawal from Whole Life taxable?
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.
- mephistophles
- Posts: 3110
- Joined: Tue Mar 27, 2007 2:34 am
Re: Is a monetary withdrawal from Whole Life taxable?
Any tax on gains would be to the owner of the policy, not the insured.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?
Re: Is a monetary withdrawal from Whole Life taxable?
yes but she is now the policy owner
the parents were kind enough to give them this tax liability
the parents were kind enough to give them this tax liability
Re: Is a monetary withdrawal from Whole Life taxable?
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.Dulocracy wrote:2) Do I need to be worried about back taxes owed on money she used for college?
Re: Is a monetary withdrawal from Whole Life taxable?
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.
- mephistophles
- Posts: 3110
- Joined: Tue Mar 27, 2007 2:34 am
Re: Is a monetary withdrawal from Whole Life taxable?
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.
Re: Is a monetary withdrawal from Whole Life taxable?
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.