Is the Cash Surrender Value of Long-term Care Insurance Taxable?

Shawn Plummer

CEO, The Annuity Expert

Hello there! Let’s jump into a subject today that many of us grapple with – Is the Cash Surrender Value of Long-term Care Insurance Taxable? Specifically, we will understand whether long-term care insurance’s cash surrender value is taxable. As you navigate the financial landscape of insurance and taxes, I hope to provide you with informative, approachable, and trustworthy insights.

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Understanding Long-term Care Insurance and Its Cash Surrender Value

Before we delve into the tax implications, it’s essential first to understand what long-term care insurance entails. This form of insurance provides coverage for not-so-easy-to-talk-about but inevitable aspects of life like chronic illnesses, disabilities, and other conditions that require long-term care. The cash surrender value, on the other hand, represents the amount that an insurance policyholder receives when they decide to terminate the policy before its maturity or the occurrence of an insured event.

Cash Surrender Value Of Long-Term Care Insurance Taxable

Is the Cash Surrender Value of Long-term Care Insurance Taxable?

The straightforward answer to this question is, ‘It depends.’ Typically, any amount received over the premiums you paid into the policy may be considered taxable income. On the other hand, if the cash surrender value is less than the sum of your premiums, it’s generally not taxable. However, this is a nuanced area and subject to changes in tax law.


Let’s say you’ve paid $30,000 in premiums for your long-term care insurance policy over the years, and now you decide to surrender the policy for a cash value of $35,000. In this scenario, an excess of $5,000 may be considered taxable.

Do You Have to Pay Tax on Cash Surrender Value?

Again, the taxability hinges on whether your cash surrender value exceeds the total premiums paid. If it does, the excess amount is generally subject to income tax.

What is Taxable When You Surrender a Life Insurance Policy?

When it comes to life insurance policies, the rules are similar. If you surrender a life insurance policy for cash, any amount you receive over the premiums paid is considered income and taxable.

Long-term Care Tax States: A Brief Overview

Different states may have specific rules about the taxation of long-term care insurance policies; staying informed about these is essential. For example, as of my knowledge cutoff in September 2021, several states offered tax incentives to encourage the purchase of long-term care insurance.

Is Employer Paid Long-term Care Insurance Taxable?

If your employer pays for your long-term care insurance, it’s generally not considered taxable income. However, any benefits received from the policy may be taxable.

Is Return of Premium Long-term Care Insurance Taxable?

In the case of return of premium long-term care insurance, if the policy is surrendered and the return of premium is more than the total premiums paid, the excess is usually taxable.

Cash Surrender Value Of Long-Term Care Taxable

Long-term Care Insurance Buyout and Its Tax Implications

In the case of a long-term care insurance buyout, any lump sum received over the premiums paid could be considered income and, thus, potentially taxable.

Is Long-term Care Insurance Tax Deductible?

Yes, long-term care insurance premiums can be tax-deductible, depending on your age and the amount of premiums. However, there are specific limits, and it’s best to consult a tax professional for advice tailored to your situation.

How to Report a Cash Surrender Value on Your Tax Return

If you have a taxable cash surrender value, you’ll need to report it on your tax return. The insurance company typically provides a 1099-R form indicating the taxable amount.

Example: If you have a cash surrender value of $12,000, with premiums paid totaling $10,000, the insurance company will send you a 1099-R form showing a taxable amount of $2,000.

Cash Surrender Value Of Long-Term Care Insurance Taxable

Consult with a Tax Professional

This guide provides a general overview, but everyone’s situation is unique. So, always consult a tax professional regarding these matters, and they can provide advice tailored to your specific circumstances.

Example: A tax consultant could explain how your policy, state laws, and financial situation may affect your cash surrender value taxability.

Next Steps

The world of taxes and insurance can often seem labyrinthine, and I hope this guide has helped shed some light on whether the cash surrender value of long-term care insurance is taxable. Remember, the golden rule is that any amount received over the premiums paid could be taxable. However, rules can vary, and it’s always advisable to consult a tax advisor or financial consultant to understand the tax implications based on your unique situation entirely. So, stay informed, stay prepared, and confidently navigate your financial journey!

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Frequently Asked Questions

How do I avoid taxes on the cash value of life insurance?

By having beneficiaries listed on your life insurance policy, they will receive the death benefit without any income tax deductions on the amount, regardless of the size of the benefit, whether it is $50,000 or $50 million.

Is the cash value of an insurance policy taxable?

If you withdraw an amount up to what you’ve already paid in premiums, it won’t be taxed because it’s considered a refund of premiums. However, if you withdraw the profits earned on the policy, such as dividends, those amounts may be subject to ordinary income tax.

How do you account for the cash surrender value of life insurance?

To determine the cash surrender value of a life insurance policy, add up all the payments made towards the policy and then subtract any surrender fees and outstanding loan balances against the policy’s cash value.

Does LTC insurance have a cash value?

You can access the policy benefit if you require long-term care. The policy offers a life insurance benefit if you pass away before requiring long-term care. If you use the money for another purpose, you can receive a cash value similar to or lower than the total premiums paid.

Are life insurance cash values subject to capital gains tax?

Are life insurance payouts subject to taxes? Generally, life insurance payouts are not considered taxable income. Nevertheless, if you decide to cancel your policy and withdraw the cash value or sell your policy in a life insurance settlement, you may have to pay capital gains or income taxes.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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