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Do I Owe Taxes When I Cancel My Cash Value Plan?

2011 May 10

When you attempt to cancel a policy that has accrued cash value, most companies will try to imply that dropping the policy will have “serious” tax consequences. There is very rarely any tax due and, if there is, it is based on the amount you receive back that is in excess of the premium you paid. By multiplying the number of years you have paid the premium times the annual cost, you can quickly determine the extent of any tax that may be due. The tax liability is only on the gain over the amount of premium paid, not the entire cash value amount. However, you need to include any dividends received during the policy term in addition to the cash value. Even if a tax is due or surrender are charges applied, Dave advises cancelling these plans and moving on to more effective strategies. The most important thing to consider is making sure you have the correct amount of life insurance to meet your family’s needs. Remember: never cancel an existing plan until you receive the new policy you are considering and you have reviewed it to make sure it meets your individual needs. Learn more about the benefits of choosing a term life policy.

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