What are the tax implications of drawing out the cash value of a policy?
When you receive a cash balance for anything you should expect some sort of tax to be taken from the initial amount. In terms of drawing out the cash on a life insurance policy, things can be a bit tricky. Drawing out the cash on a policy means you have established a life insurance policy in the past for a specific amount over a period of time (ex: $150,000 over 20 years), and instead of letting the policy run its course or wait for the insured person to die in the time frame, you pull out the cash-surrender value of the policy and cancel the deal altogether. In order to get your net profit you must add up all premiums you paid for the policy, and subtract it from the amount of money you pull from the policy. Say for your $150,000 policy over 20 years gets canceled at the 19th year and you paid $500 in premiums per year. That would equal $9,500 in premiums paid. Also say the cash out policy you took was about $20,000. Subtract the two and you would have received $10,500 in net profit. That overall profit would then be taxable by the IRS and should be filed under your federal income tax.