What is the federal income tax treatment of life insurance's cash surrender value?

The cash surrender value of a life insurance policy is generally not taxable as long as it is not exceeding the total premiums paid into the policy. When a policyholder surrenders their life insurance policy for its cash value, they can access that cash value without incurring taxes unless it exceeds the total amount of premiums paid into the policy. Therefore, if a policyholder surrenders the policy, any gain (the amount received minus the premiums paid) is subject to income tax.

Choosing that the entire cash surrender value is taxable overlooks the subtleties of how income tax applies to cash values in life insurance. It's important to understand that the taxation applies only to the amount that exceeds the total premiums paid, which directly contradicts the idea that the entire cash surrender value would be taxable.

By focusing on the specifics of how gains from cash surrender values are taxed, a clearer understanding of tax implications surrounding life insurance can be obtained.