All Life Insurance Tips

Taxable income on whole life insurance?

I have a $200,000 life insurance policy that has a $100,000 loan on it and the company says that I must pay $4000 minimum to keep the policy in force. I am 70 years old and if the policy lapses the company says they will report a $100,000 gain to the IRS. Can I transfer this policy ownership to my daughter and then let it lapse to avoid the tax?

Public Comments

1. I believe this may be income to your daughter. Talk to a financial advisor or a tax accountant (CPA) for the best thing to do.
2. Do NOT let it lapse! Either pay the premium to keep it in force, or solicit an offer for a life settlement. Either now or within a few years (largely dependent on your health) you'll be able to settle for at least enough to walk away from the policy, and possibly come away with a pretty good sum of cash.
3. You may be able to lower the face amount. It's unlikely that the $100,000 is all taxable -- especially on a $200,000 policy.
4. You are missing some important info. You say it is whole life but are you sure it is not a Universal life? It is almost impossible to have a $100,000 loan on it. How many years did you have the policy? Or, how much did you pay into it? It is impossible to have $100,000 gain on that policy. Why is the company asking for $4,000 to keep the policy going? Is that for the interest on the loan or for the premium? Does the policy earn dividends? I would call the insurance company directly and ask them if there is a taxable gain if the policy cancels. I would bet the person that told you there is a $100,000 gain on it is wrong. Not everyone knows how to calculate those gains. You only have a gain if you got more money out of the policy than you put in. That is unlikely but it can happen depending on the circumstances. If you transfer the ownership to your daughter then the taxable gain would be hers. And, it would not be reported to the IRS until next year. You really need to talk to your insurance agent or the company directly to get some answers to the questions above. After you have them then repost some of the answers to get better answers to your questions. I think the person that told you that you would have a $100,000 gain is totally wrong, but I could be wrong. But I bet they are wrong. Check again and speak to someone that really knows. Call the insurance company yourself and ask for someone in the department that handles taxable gains. Good Luck.
5. My suggestion is to keep the policy to avoid the huge income tax of the $100,000 loan and try to pay off the loan (or most of it). When the loan is paid off, then cancel the policy. You can transfer ownership to your daughter, but does your daughter want to pay $4000/month for it? If she becomes the owner, she will be liable for the taxes on the loan if she decides to cancel the policy.