Why must I pay taxes on my surrendered whole life policy?

This answer was provided by Mark Misselbeck, CPA, from Levine, Katz, Nannis & Solomon PC in Needham.

Q: I surrendered a whole life policy in 2003 after 29 years of paying on it. They say I've made a $6,400.00 profit on it, but I've been given 1099-INT forms for the life of the policy and paid taxes on those amounts. How can there still be any taxes due? - David, Wilmington

A: The Insurance Company has compared the total of the premiums paid by you, including the interest that you earned and left on deposit with those premiums, to the total that it is paying to you on the surrender of the policy. Any excess is a net gain that is taxable income. In this case, their records show that to be the $ 6,000+ amount. Unless you have the records to compute that amount to compare to your "cash out" amount to prove them wrong, that will be the amount that you will have to report as income on your return.