Author Topic: Cashing out Insurance Policy  (Read 2139 times)

sloth

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Cashing out Insurance Policy
« on: December 22, 2019, 12:08:27 PM »
We are self insured. Husband has an old insurance policy that his parents took out for him when he was a kid and we would like to cash it in. But before doing that, I want to understand the tax implications.  For this, I need to determine the basis for the policy and the cash surrender value.  Then figure out if the surrender value is more or less than the basis.

From the insurance website, I can see
-> Total cash value
-> Total paid (gross premiums)
-> Total net paid (gross premiums less expenses)

Is the basis the Total Paid (gross premiums paid) or the Total Net Paid?
In my research,  haven't read anything that mentioned the Total Net Paid value, so I believe the basis is the Total Paid number.

I think that the surrender value is the Total cash value minus any fees to cash out.

If we made money on the policy- From what I have read, we would report any profits as "other income" on 1040.

If there is a loss, is there a way to claim that? If we had a loss, DO we have to claim it? I haven't come across anything about that, so I'm thinking the answer is no, and we should just be happy to be done with the policy. 

Has anyone gone through this? Am I on the right track?
Our income for 2020 will be intentionally low, and I am trying to stay high enough to maintain ACA subsidies. Which is why I am concerned about the loss part, and I just don't want any major surprises if/when .we cash out

Thanks for your help!


secondcor521

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Re: Cashing out Insurance Policy
« Reply #1 on: January 01, 2020, 12:00:39 PM »
To the best of my knowledge, if there is a loss, there is no way to claim it and also no requirement to claim it.

I went through it a long time ago.  I think you are on the right track.

Since you mentioned the ACA:

1.  Traditional to Roth conversions create income for purposes of ACA subsidies.

2.  If you have an estimated income that is accepted and you get advance premium tax credits, you can still get the ACA subsidies even if your actual income ends up too low as long as you otherwise qualify.  From the instructions for Form 8962 (line 6):

"Estimated household income at least 100% of the federal
poverty line. You may qualify for the PTC if your household
income is less than 100% of the federal poverty line and you
meet all of the following requirements.
• You or an individual in your tax family enrolled in a qualified
health plan through a Marketplace.
• The Marketplace estimated at the time of enrollment that your
household income would be at least 100% but not more than
400% of the federal poverty line for your family size for 2019.
• APTC was paid for the coverage for one or more months
during 2019.
• You otherwise qualify as an applicable taxpayer (except for
the federal poverty line percentage)."

(https://www.irs.gov/pub/irs-pdf/i8962.pdf bottom of page 8, left column)