--- title: Thinking of making a change to your permanent life insurance policy? Be sure to understand the income tax “what-ifs” and big risks. description: Understand the tax implications and risks before making changes to your permanent life insurance policy. Learn about surrendering, selling, withdrawing, and borrowing against your policy. image: https://blog.apellawealth.com/hubfs/Thinking%20of%20making%20a%20change%20to%20your%20permanent%20life%20insurance%20policy.jpg --- - [Blog](https://blog.apellacapital.com) - [Client Logins & Resources](https://apellawealth.com/client-resources) [Planning Portal](https://wealth.emaplan.com/ema/ria/apella) [Investment Portal](https://login.orionadvisor.com/login.html?g=81341136-264e-4b17-840a-c27cdbfec9ee) [![Apella Wealth](https://blog.apellawealth.com/hs-fs/hubfs/raw_assets/public/ApellaCapital_October2020/images/Apella-Logo-Color.jpg?width=1000&height=200&name=Apella-Logo-Color.jpg "Apella Wealth")](https://www.apellawealth.com) - [Us ](https://apellawealth.com/us) - [About Us](https://apellawealth.com/us) - [Regulatory Information](https://apellawealth.com/regulatory-information) - [You ](https://apellawealth.com/you) - [Individuals And Families](https://apellawealth.com/you/individualsandfamilies) - [Businesses and Institutions](https://apellawealth.com/you/businessesandinstitutions) - [Retirement Plans](https://apellawealth.com/you/retirementplans) - [Advice ](https://apellawealth.com/advice) - [Planning](https://apellawealth.com/advice) - [College Planning](https://apellawealth.com/college-planning) - [Women in Transition](https://apellawealth.com/women-in-transition) - [Investing](https://apellawealth.com/advice#Investing) - [Locations](https://apellawealth.com/locations) - [For Advisors](https://apellawealth.com/advisors) - [Community](https://apellawealth.com/apella-in-the-community) - [Events](https://apellawealth.com/events) - [Podcast](https://talkingrealmoney.com/) - [Connect](https://share.hsforms.com/25U-vQ2CYQbOAfp8S7RVw7A48g5l) - [Us](https://apellacapital.com/Us) - [You ](https://apellacapital.com/You) - [Individuals And Families](https://apellacapital.com/You/IndividualsAndFamilies) - [Businesses and Institutions](https://apellacapital.com/You/BusinessesAndInstitutions) - [Retirement Plans](https://apellacapital.com/You/RetirementPlans) - [Advice ](https://apellacapital.com/Advice) - [Planning](https://apellacapital.com/Advice/#Planning) - [Investing](https://apellacapital.com/Advice/#Investing) - [Education & News](https://apellacapital.com/Advice/EducationEvents) - [Locations ](https://apellacapital.com/Locations) - [Atlanta, GA](https://www.apellacapital.com/Locations/Atlanta-GA) - [Bellevue, WA](https://info.apellacapital.com/vestory-bellevue-wa) - [Cutchogue, NY](https://apellacapital.com/Locations/Cutchogue) - [Dallas, TX](https://apellacapital.com/Locations/Dallas) - [Glastonbury, CT](https://apellacapital.com/Locations/Glastonbury) - [Knoxville, TN](https://apellacapital.com/Locations/Knoxville) - [Lenox, MA](https://apellacapital.com/Locations/Lenox-(1)) - [Marblehead, MA](https://apellacapital.com/Locations/Marblehead) - [Providence, RI](https://apellacapital.com/Locations/Providence) - [San Francisco, CA](https://apellacapital.com/Locations/San-Francisco) - [For Advisors](https://apellacapital.com/Advisors) - [Connect](https://apellacapital.com/Connect) ## Apella Wealth Blog ![](https://blog.apellawealth.com/hubfs/Thinking%20of%20making%20a%20change%20to%20your%20permanent%20life%20insurance%20policy.jpg) Share Copy link [Share on LinkedIn ](https://www.linkedin.com/sharing/share-offsite/?url=https%3A%2F%2Fblog.apellawealth.com%2Fthinking-of-making-a-change-to-your-permanent-life-insurance-policy-be-sure-to-understand-the-income-tax-what-ifs-and-big-risks) [Share on Facebook ](https://www.facebook.com/sharer/sharer.php?u=https%3A%2F%2Fblog.apellawealth.com%2Fthinking-of-making-a-change-to-your-permanent-life-insurance-policy-be-sure-to-understand-the-income-tax-what-ifs-and-big-risks) [Email ](mailto:?subject=%3Cspan+id%3D%22hs_cos_wrapper_name%22+class%3D%22hs_cos_wrapper+hs_cos_wrapper_meta_field+hs_cos_wrapper_type_text%22+style%3D%22%22+data-hs-cos-general-type%3D%22meta_field%22+data-hs-cos-type%3D%22text%22+%3EThinking+of+making+a+change+to+your+permanent+life+insurance+policy%3F%C2%A0Be+sure+to+understand+the+income+tax+%E2%80%9Cwhat-ifs%E2%80%9D+and+big+risks.%3C%2Fspan%3E&body=https%3A%2F%2Fblog.apellawealth.com%2Fthinking-of-making-a-change-to-your-permanent-life-insurance-policy-be-sure-to-understand-the-income-tax-what-ifs-and-big-risks) Save as PDF # Thinking of making a change to your permanent life insurance policy? Be sure to understand the income tax “what-ifs” and big risks. Published by [Claire Thornton MST, EA, CFP®](https://blog.apellawealth.com/author/claire-thornton-mst-ea-cfp-1) on Sep 4, 2025 8:18:00 AM ## **Let’s start with the basics: What is permanent life insurance?** Unlike term life insurance, which covers you for a set number of years and then lapses if you outlive the term, **permanent life insurance** stays in place for your entire lifetime. There are four main types: whole life, universal life, indexed universal life, and variable universal life.1 Each comes with its own pros, cons, and complexities. Deciding whether permanent life insurance is right for you should involve a detailed analysis with your financial planner. What all permanent policies have in common is a cash value component - and this plays a key role in how the policy is taxed.   ## **So, what happens if ...**   ## **…you surrender the policy?** You’ll owe taxes on any gain, taxed at [ordinary income rates](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025). Here’s the formula: Cash Surrender Value – Total Premiums Paid (your basis) = Taxable Gain The *cash surrender value* is the policy’s cash value minus any surrender charges and outstanding loans (plus interest). You don’t need to crunch the numbers yourself. Your insurance agent can provide both the current cash surrender value, and your total premiums paid to determine the gain subject to tax.   ## **…you sell the policy on the secondary market?** You may be surprised to learn this is an option. If you are looking to get rid of a permanent life insurance policy, selling it, rather than simply surrendering it, could result in a larger payout. This is known as a life settlement.3 The sales proceeds will be taxed at either ordinary or long-term capital gain tax rates as follows: - The amount up to the cash surrender value, minus the total premiums paid (your basis), is taxed at ordinary income rates. Any amount above the cash surrender value is taxed at preferential [long-term capital gains tax rates](https://www.irs.gov/taxtopics/tc409).4   ## **…you withdraw the cash value?** You can withdraw up to the amount of premiums paid (your basis) tax-free. Withdrawals above your basis are taxed as ordinary income. Is it starting to sound familiar?   The caveat, in rare situations, is if a permanent life insurance policy is considered a modified endowment contract (MEC), gains may be taxed first and subject to a 10% penalty if under age 59 ½.4 ## **…you borrow against the cash value?** Loans from your policy are not taxable, as long as the policy remains in force. However, if the policy lapses (due to missed payments, a growing loan balance, or a surrender), the loan may become taxable. If the loan isn’t repaid before your death, the outstanding balance (plus interest) will be deducted from the death benefit. Keep in mind, while the loan component is a plus, interest charges can be steep.   **Bottom line? **While there are several complexities in how permanent life insurance policy is taxed during your lifetime, one simple tax rule stands out:** your beneficiaries inherit the entire death benefit income tax free**. Curious about the options related to your own permanent life insurance policy? [Let’s talk](https://share.hsforms.com/25U-vQ2CYQbOAfp8S7RVw7A48g5l)!   Source: 1. [iii.org](http://www.iii.org): [What are the different types of permanent life insurance policies? | III](https://www.iii.org/article/what-are-different-types-permanent-life-insurance-policies) 2. gov: [IRS releases tax inflation adjustments for tax year 2025 | Internal Revenue Service](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025) 3. com: [Life Settlement: Meaning, Benefits, FAQs](https://www.investopedia.com/terms/l/life_settlement.asp) 4. gov: [Topic no. 409, Capital gains and losses | Internal Revenue Service](https://www.irs.gov/taxtopics/tc409) 5. com: [Modified Endowment Contract (MEC): Definition and Tax Implication](https://www.investopedia.com/terms/m/modified-endowment-contract.asp)   Disclosures: Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. A copy of Apella’s current written disclosure brochure filed with the SEC which discusses among other things, Apella’s business practices, services and fees, is available through the SEC's website at: [www.adviserinfo.sec.gov](http://www.adviserinfo.sec.gov). No current or prospective client should assume any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice. Apella Wealth does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice. Apella Wealth does not sell commission-based insurance products. The firm does work with clients through the financial planning process to identify potential gaps in insurance coverage and may facilitate placement of insurance at client direction. Tags: [Tax](https://blog.apellawealth.com/tag/tax) [Back to Blog](https://blog.apellawealth.com) Share Copy link [Share on LinkedIn ](https://www.linkedin.com/sharing/share-offsite/?url=https%3A%2F%2Fblog.apellawealth.com%2Fthinking-of-making-a-change-to-your-permanent-life-insurance-policy-be-sure-to-understand-the-income-tax-what-ifs-and-big-risks) [Share on Facebook ](https://www.facebook.com/sharer/sharer.php?u=https%3A%2F%2Fblog.apellawealth.com%2Fthinking-of-making-a-change-to-your-permanent-life-insurance-policy-be-sure-to-understand-the-income-tax-what-ifs-and-big-risks) [Email ](mailto:?subject=%3Cspan+id%3D%22hs_cos_wrapper_name%22+class%3D%22hs_cos_wrapper+hs_cos_wrapper_meta_field+hs_cos_wrapper_type_text%22+style%3D%22%22+data-hs-cos-general-type%3D%22meta_field%22+data-hs-cos-type%3D%22text%22+%3EThinking+of+making+a+change+to+your+permanent+life+insurance+policy%3F%C2%A0Be+sure+to+understand+the+income+tax+%E2%80%9Cwhat-ifs%E2%80%9D+and+big+risks.%3C%2Fspan%3E&body=https%3A%2F%2Fblog.apellawealth.com%2Fthinking-of-making-a-change-to-your-permanent-life-insurance-policy-be-sure-to-understand-the-income-tax-what-ifs-and-big-risks) Save as PDF ## Related Articles ## [Unlocking Retirement Potential: Tax Implications of Rolling Over 529 Plans to Roth IRAs](https://blog.apellawealth.com/unlocking-retirement-potential-tax-implications-of-rolling-over-529-plans-to-roth-iras) With the passage of the SECURE 2.0 Act, families now have an exciting new financial planning... 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