Question for the Money Doctors

Question submitted on Feb 17, 2012.

Question

I am recently divorce and I have recently surrendered a life insurance policy that I received the cash value of roughly $5000. The Premium paid into this policy was roughly $9000. I know that the amount is not taxable because more premiums were paid but can I deduct the loss of $4000?

Answer

The loss on the life insurance policy can not be deducted. However, you can roll over (Section 1035 exchange) your life insurance policy into a fixed or variable annuity. Your basis in that annuity will be equal to your income tax basis in the life insurance policy. That would allow you to shelter $4,000 of future income in the annuity. You could cash the annuity out later and $4,000 of earnings would not be taxable.