Cash value proceed, taxable?

[EA-Sports]

So my friend asked me this question and I’m not sure about the answer. For life insurance that has investment component, is there any circumstance where the withdrawal of the cash value of this life insurance is not taxable? I’m pretty sure the cash value proceed is taxable but not 100% sure.

The thinking is to use this as another retirement investment option/strategy. I personally prefer to stick with term life insurance and invest the extra money myself but I’m wondering if it is possible to use cash value of the investment portion of life insurance to minimize tax in retirement.

Thanks in advance.

 

[gauss]

The IRS provides an interactive calculator that might be useful.

The results that I obtained when I ran a scenario through it, however, were the opposite of how I thought it worked, so you would probably want to validate the results from the tool with other documentation such as IRS Publication 525 - Taxable and Nontaxable Income.

-gauss

 

[VanWinkle]

Whole life cash values are FIFO as far as distributions. The money you put into the cash value(premiums beyond life insurance purchase) are not taxed as long as after tax money was used to purchase them. The interest/earnings are the last out and they are taxable. In some cases, you can remove the non-taxed portion and then take out a loan on the portion that would be taxed. This will reduce any life ins payout significantly and the premiums will still need to be paid.

 

[pb4uski]

^^^ +1 That's my understanding too.

Or if your you can borrow up to 90% or 95% of cash value rather than surrendering and the loan proceeds would not be taxable. This is probably the better play as if your friend dies then his beneficiaries would get the death benefit less the policy loan unless part of his interest in surrendering is to stop having t make premium payments.

 

[CaliKid]

The life insurance lobby is strong so it grows without tax and loans are without tax. Many people use it as an investment alternative. I am not convinced that it is the right thing to do as the insurance component is still there and that costs money. For people that have an insurance need there is perhaps a reasonable argument to make to use it as an investment option.

 

[EA-Sports]

Thanks a lot everyone.