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Cashing in your life insurance policy? Consider the options. By Michael T. Livesay, CPA/PFS L something most people obtain at some point during their lifetime in order to protect their loved ones and/or business partners. Many times the life policy is what is called ���permanent��� insurance. This means the premiums paid each year exceed the actual mortality expenses and the difference accrues earnings under the terms of the contract. Over time, these types of life policies may build significant cash values. Typically as the insured ages and begins to evaluate the cost and need for the policy, the death benefit may no longer be needed due to life changes. At that time, one of the questions to be asked is��� what is my tax consequence for taking the cash? Fortunately the cash value build up is not taxed as it grows inside the policy. Unfortunately, the premiums you pay are not deductible, but they can be used to reduce the amount of taxable proceeds when you cash in the policy. Generally the cash value you receive is taxable to the extent it exceeds the premiums you paid. I say generally because every insurance policy has different features and some costs built into your premium may not be eligible to offset your taxable gain. Once the taxable gain is determined, the next question becomes���how am I taxed on that gain? It is taxed as ordinary income and not the preferred long-term capital gain. There are exceptions to being taxed when you take the cash but these all involve exchanges to another insurance IFE INSUR ANCE IS product. The most commonly used exception is when someone has Insurance Company A send the cash value directly to Insurance Company B in exchange for a different life policy. A less used, but viable exception is when someone exchanges the cash value of the life policy directly for an annuity. In both of these cases, this is merely a deferral of the gain, and taxation cannot be escaped if the insured actually receives the cash value from the life policy or annuity before death. In the case of the annuity, the taxable gain can be spread over a long period of time as distributions through a process called annuitization. Depending on the insured���s situation, the exception that may make the most sense is exchanging the cash value of the life policy for a policy providing tax-free long-term care benefits. If the insured is worried they will never use the long-term care benefits, there are even ways to buy a separate life policy or a hybrid long-term care/life policy to ensure your family gets some return on the money you invested. Canceling a permanent policy can be extremely complex, so it is always prudent to explore your options with both your insurance agent and tax advisor to ensure your objectives are obtained without any nasty surprises. Michael Livesay is a principal of Weidrick, Livesay, Mitchell & Burge, LLP in Akron. He is a CPA and a Personal Financial Specialist (PFS). ��� JANUARY- FEBRUARY 2013 ��� MDNEWS.COM ��� MD News Cleveland/Akron/Canton | 41