Practice Quiz

Health and Life Insurance

Category - Tax Issues

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When a life insurance policy is surrendered or lapsed, any gain in the policy's cash value will be __________.
  1. Received tax free by the insured
  2. Taxed as ordinary income
  3. Taxed as a capital gain
  4. Taxed at estate tax rates
Explanation
Answer: B - When a life insurance policy is surrendered or lapsed, any gain in the policy's cash value is taxed at ordinary income tax rates. The amount considered as income or gain is the amount of money that exceeds the policy holder's basis in the policy.
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