New York State Life Insurance Exam Questions Practice Question
If a policyowner surrenders a policy for its cash value, when is a tax liability incurred?
Correct Answer: A
Rationale: When a policyowner surrenders a policy for its cash value, a tax liability arises only when the cash value exceeds the total premiums paid. This is because the gain (cash value minus premiums) is considered taxable income.
Option B is incorrect, as there is no taxable gain if the cash value is less than the premiums paid. Option C involves an exchange of policies, which typically does not trigger taxes under IRS rules, so it does not incur a liability. Option D suggests a transfer to a third party, which may have different tax implications but does not directly relate to the surrender of the policy for cash value.
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