What you describe is a tough situation. You can't afford to continue paying premiums, and your son, who apparently can afford them, doesn't want to pay. Kind of a Catch-22!
Unfortunately, because you transferred the ownership to your son, only he can make a decision as to what to do about the policy. He can drop it. He can cash it in and take the $4,000 tax-free. The only mistake you made was not talking to a life insurance expert, who could have explained your options better, before you transferred the ownership.
Your life insurance policy will not be taxable. First, because your cash value is less than the premiums paid, there should be no taxes on the cash if you surrender the policy. And dividends are always tax-free. Second, if you keep the policy, there is no taxation of life insurance benefits paid to the named beneficiary, which I assume is your son.
Besides surrendering the policy, here are some other options that might make sense. They're available to you with a whole life policy, and you don't have to make another premium payment for the rest of your life. (Hopefully your son will go along with your wishes.)
- Extended term life insurance. You can trade in the cash and receive a prepaid term life insurance policy for the same death benefit as you now have that will cover you for several years into the future. This is a good option if you are not in good health.
- Reduced paid-up whole life insurance. You can exchange your existing policy for another whole life policy for a lesser death benefit that will be paid up, without any further premiums due for as long as you live.
Now that I have answered your questions about taxes, I have a question for you: Since the purpose of life insurance for you is just cremation expenses, why not take the cash and dividends, and use them to pay for a prepaid cremation? (Hopefully, your son will do the eulogy at no charge!)