Dear Insurance Adviser,
I am 76 years old and receive $819 monthly after a Medicare deduction. Because the cost of living is so high, I am getting into debt and thinking about cashing in my life insurance. I paid $57.04 a month for 20 years, and the policy has an approximate surrender value of $11,020.
I would use the money to prepay for my funeral first, and then
take care of bills. Do I have to pay tax on the policy proceeds? If
so, what amount is taxable? Any information would be helpful.
If you decide to surrender your policy now, the money will be tax-free to you. The reason is that you paid more into the policy in premiums than you will receive in cash value: $57.04 a month for 20 years works out to nearly $14,000 in paid premiums. No gain means no tax would be due.
You don’t say how much life insurance you have, but let’s assume it’s a $25,000 policy. You should know that you have other options besides just surrendering the policy.
For example, you could exchange it for a paid-up policy with a smaller death benefit — say $20,000. That action would stop all further premium obligations, saving $57.04 a month in your budget. Since you were going to use most of the $11,020 surrender value to prepay your funeral, maintaining the life insurance would essentially accomplish the same thing.
Upon your death, the life insurance policy would return all the cash value and more to your beneficiaries. In the meantime, you could always borrow from the cash value, instead of surrendering the policy, when you need extra cash.
The point I’m making is that you have some viable options that are very attractive. I highly recommend that you consult with a life insurance agent or a financial planner to sort this out.
I hope this was helpful.