VUL Termination Question

Greetings,

I'm a couple of years into a Variable Universal Life policy. I've since come to the conclusion that such a policy is just not my cup of tea, and wish to surrender.

While the actual value of the cash portion is greater than my basis (the total monthly premiums I've paid into it), the surrender value is less.

What can I expect to happen tax-wise? Do I show a capital loss (difference between the basis and surrender value)? Is the surrender value considered ordinary income (and therefore taxed)?

Thanks for any assistance.

DerleJamem

Hi;

If your surrender value is less than your basis, there will be no taxable gain. However I don't believe the IRS lets you take a loss.

This is beyond the scope of your question, but I would consider a few things before you do this. Do you have an ongoing need for life insurance? If so I hope you're evaluating some other types of policies -- perhaps term or low-load universal life. Your current cash value might go a long way in paying the premiums for one of these alternatives.

Like a lot of us, you were probably sold this policy by a well meaning agent who focused on the investment aspects of the cash value -- as though it were a mutual fund -- and may have barely even mentioned anything about the life insurance component. If your priority is on investing, there are a lot of no-load, low expense mutual funds out there that will provide a better return than a VUL cash value, probably even if held in a taxable account.

Anyway, consider your original reasons for obtaining this policy -- insurance or investing -- and your reasons for wanting to walk away from it now --and make your next move accordingly.

Good luck!