If I’m closing out a whole life insurance policy, is the policy value taxable in addition to the capital gains?

by Amy M. Swartzfager, CPA | Jun 22, 2018

I want to close a whole life insurance policy. The close-out value of the policy is about $1,900. The capital gains will be $8,900. I am told the capital gains is taxable. Is the policy value ($1,900) taxable as well?

When premiums are paid into a whole life insurance policy, some of the funds go into a reserve to prevent premiums from increasing over the life of the policy. Assuming the reserve is the close-out value, it would only be taxable to the extent that there was growth on those funds. Any funds you paid into this reserve would not be taxable because it is considered a return of your own money. Your insurance carrier should be able to provide more details on this information.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Amy M. Swartzfager, CPA, is a senior tax analyst with API Technologies Corporation in Fairview, Pa. 

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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