What triggers a taxable gain when cashing out a cash surrender value (CSV) in a life insurance policy?

Cashing out a cash surrender value (CSV) in a life insurance policy can trigger a taxable gain based on the difference between the cash received and the adjusted cost basis. When a policyholder decides to surrender their life insurance policy for its cash value, the amount they receive is compared to what they have invested in the policy.

The adjusted cost basis represents the total premiums paid into the policy, adjusted for any dividends or withdrawals that have been made. If the CSV is greater than the adjusted cost basis, the difference is considered a taxable gain. This is because the policyholder is receiving more than they invested, thus realizing a profit on the transaction.

Understanding this concept is crucial for individuals considering cashing out their life insurance policy, as they need to be aware of potential tax implications arising from surrendering for more than what they originally contributed.