Question

An insured has contributed $12,000 in premiums toward a universal life policy. She decides to cancel the policy and take the cash value of $15,000. What are the tax consequences of this distribution?

Answer 1

Answer: The tax consequences of this distribution is $3,000 only.

Step-by-step explanation:

Since $12,000 is the cost basis, that is the return of after tax dollars, it therefore means that $12,000 subtracted from $15,000 is the amount taxable as ordinary income.

And that is $3,000