<p>In packing up the house for our move we found a small pile of whole life policies my wife had bought long ago. Most are smallish–around $10k each and one for $50K. All are fully paid up with the dividends reinvested. I think they could be worth some good $$$. She has no clue. All were bought back in the 70s and 80’s from good cos that still exist…Is this a nice windfall? Can we cash them out?</p>
<p>You sure can! Congrats!</p>
<p>Yes, yes you can!</p>
<p>Thanks. Maybe the kitchen and bath get updated now. Assume there is tax to be paid. Is it cap gain or reg income?</p>
<p>If you surrender (cash out) the policies, the policy owner will be taxed on the gain (profit), roughly the amount above total premiums paid. The gain is considered ordinary income for tax purposes. </p>
<p>Most likely they are not truly paid up, rather they are using dividends to pay future premiums. Do you need the cash? You may be able to take a tax-free loan instead of outright surrender. Or if you don’t need the cash immediately, you can do a tax-free transfer to an annuity. The cash would grow tax deferred, only taxed when you take it out. If you don’t need the cash, do you need the insurance? If so, you may be able to roll it over to a larger paid-up policy. These are questions to ask before deciding what to do.</p>
<p>Don’t need the insurance. Cash is always nice. Marg tax rate should be lowish. Loans do not appeal much at this point. Like the annuity idea but have heard bad things about them in general. High hidden fees etc.</p>
<p>Have you been getting 1099s each year for the interest accruing and putting it on your taxes? My wife had a small whole life policy her parents had opened for her. She/we had paid taxes on the interest each year even though it was going to cash value so when we surrendered it, it was a non-taxable event.</p>
<p>You might want to see if you can do a tax free exchange (Section 1035?) of these policies for long term health care since that is more likely to be a need for you. However, the bathroom remodel sounds like fun 
</p>
<p>Here’s an article about 1035 exchanges of life insurance policies for something else. </p>
<p><a href=“http://www.nasdaq.com/personal-finance/should-you-exchange.aspx”>http://www.nasdaq.com/personal-finance/should-you-exchange.aspx</a></p>
<p>Here’s the IRS explanation of your options:</p>
<p><a href=“http://www.irs.gov/pub/irs-drop/n-03-51.pdf”>http://www.irs.gov/pub/irs-drop/n-03-51.pdf</a></p>
<p>There are several kinds of annuities. Some have high hidden fees, some are quite simple. Variable and indexed annuities are the ones that tend to get the bad rap, though they can be perfectly appropriate for some people. They invest in mutual fund-like accounts or pay an interest rate tied to a market index. There are fees, but some of them provide valuable guarantees for the money. Fixed annuities are very simple with no hidden fees. You earn a fixed interest rate, just like a CD. Immediate annuities are also very simple. You give a lump sum to the insurance company in exchange for guaranteed income for the rest of your life or some set time. With all annuities, there is no tax until you receive money. Since you asked.</p>
<p>The idea of tax free exchange (it is Section 1035) to a long term care product might make sense. Basically you would be leveraging that money to pay for future long term care needs. Depending on your age, you might get 3-5x the amount. For example, a $100K deposit might buy $300-500K of long term care coverage. Could be a valid idea, though I suspect those policies may be too small.</p>