If a withdrawal from a life insurance policy is $12,000 and the policy's cost basis is $10,000, how much is taxable?

If a withdrawal from a life insurance policy is $12,000 and the policy's cost basis is $10,000, how much is taxable?

• A. $12,000
• B. $2,000
• C. $10,000
• D. $22,000

Answer: (B)

Withdrawals from cash value life insurance are tax-free up to the policy’s cost basis (premiums paid); any amount above the basis is taxed as ordinary income. Here, you’re taking out 12,000, while the cost basis is 10,000, so 2,000 represents gains. That 2,000 is taxable as ordinary income. (This assumes a standard non-MEC policy; tax treatment can differ for MEC policies.) Therefore, the taxable amount is 2,000.

Withdrawals from cash value life insurance are tax-free up to the policy’s cost basis (premiums paid); any amount above the basis is taxed as ordinary income. Here, you’re taking out 12,000, while the cost basis is 10,000, so 2,000 represents gains. That 2,000 is taxable as ordinary income. (This assumes a standard non-MEC policy; tax treatment can differ for MEC policies.) Therefore, the taxable amount is 2,000.