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I took out a whole life insurance plan through State Farm years ago. I mistakenly took out many loans against the policy. Last year, it finally hit a point where the policy was unable to cover the loans, so it closed. I received a 1099 detailing the taxable distribution as well as the cash surrender value. Is there any way I can eliminate or reduce my exposure?


The BIDaWIZ Team's Answer:

The cash surrender value (i.e. premiums paid) via box 5 is essentially the difference between the gross amount in box 1 and the taxable distribution amount in box 2a. While you never withdrew money from the account, the loans you took against the value accrued unpaid interest. As such, the 1099-R you're receiving likely reflects the compounded unpaid interest on the loans over many years. When the policy ended, this unpaid interest causes a taxable event as referenced in IRC Section 108. We would recommend that you contact the issuer as soon as possible to confirm that this is in fact the case. if this is the case, we would recommend that you try to lower your taxable income via retirement plan contributions and other above the line deductions.

The BIDaWIZ Team



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