Are There Penalties?

There aren't many times when you'll pay taxes for cashing out a whole life insurance policy, but there are some.

QUESTION: Listener on Twitter wants to know if there will be any tax penalties for cashing out a whole life insurance policy.

ANSWER: Ninety-nine percent of the time, no. That's because your basis for tax purposes in a whole life insurance policy is the total of all the money you've ever paid into it. When you add up all the premiums you've ever paid, and any money you may have put in on the front end, then as long as your cash value isn't more than that number, you do not have any taxes. And that number is almost never more, because whole life insurance policies stink.

They have a horrible rate of return. You almost never get out even what you put in. Their growth rate is just horrendous. That's one of the reasons I tell you never to buy them. Occasionally, one out of 100 times, I've run into someone who has had one for many years and it's worked out to where there's a little bit of a gain on it. But even then, it’s not much of a gain.