Maximizing Tax Benefits of Life Insurance Policies: Understanding Premiums, Cost Basis, and Cash Value

The life insurance policy cost basis consists of:AThe premiums paid inBThe net amount at riskCThe dividends receivedDThe cash value of the policy

A: The premiums paid in

A. The premiums paid in.

The cost basis of a life insurance policy is the amount of money that has been paid in premiums over the life of the policy. This includes any additional premiums paid for riders or supplemental benefits. The cost basis is used to determine the tax treatment of any withdrawals or loans from the policy. If the amount withdrawn or borrowed exceeds the total premiums paid, the excess is considered taxable income. Therefore, it is important to keep track of the premiums paid in order to maximize the tax benefits of the policy.

B. The net amount at risk is not part of the cost basis, but rather the amount of protection the policy provides. It is calculated as the death benefit minus the cash value of the policy.

C. Dividends received from a life insurance policy are considered a return of premium and are not part of the cost basis of the policy.

D. However, the cash value of the policy can affect the cost basis of the policy if the policy is surrendered or if a loan is taken against the policy. The amount of the loan or surrender value that exceeds the cost basis is considered taxable income.

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