If the cash value exceeds the premiums paid, the excess is taxable as ordinary income; which feature does this describe?

If the cash value exceeds the premiums paid, the excess is taxable as ordinary income; which feature does this describe?

• A. Cash Payment
• B. Cash Surrender Value
• C. Extended Term
• D. Options

Answer: (B)

This question tests how cash value in a permanent life policy is taxed when you surrender the policy. In these policies, part of your premiums builds up as cash value, growing tax-deferred. If you surrender the policy and the cash value you receive is more than your total premiums paid (your cost basis), the amount that exceeds those premiums is taxed as ordinary income. This specific tax treatment describes the cash surrender value—the amount you get back upon surrender. The other features don’t fit this tax rule: a cash payment is just a payout, not tied to surrender and tax treatment; extended term uses cash value to convert to term insurance, not the surrender tax issue; and “options” is a broad term that doesn’t pinpoint the surrender-valuation tax rule.

This question tests how cash value in a permanent life policy is taxed when you surrender the policy. In these policies, part of your premiums builds up as cash value, growing tax-deferred. If you surrender the policy and the cash value you receive is more than your total premiums paid (your cost basis), the amount that exceeds those premiums is taxed as ordinary income. This specific tax treatment describes the cash surrender value—the amount you get back upon surrender.

The other features don’t fit this tax rule: a cash payment is just a payout, not tied to surrender and tax treatment; extended term uses cash value to convert to term insurance, not the surrender tax issue; and “options” is a broad term that doesn’t pinpoint the surrender-valuation tax rule.