How to calculate the taxable amount for a cashed-in whole life insurance policy

Cashing in a whole life policy often comes with an unwelcome surprise, a tax bill, and this piece walks through how that taxable amount is figured. Unlike capital gains, where only part of the gain is taxed, the calculation here is the cash surrender value minus the policy's adjusted cost base, with the whole difference taxable. The adjusted cost base is roughly the premiums paid less the underlying cost of the insurance, and because that cost climbs as you age, the base can shrink toward zero over the years, leaving much of the cash value exposed. It's most relevant to anyone considering surrendering an older whole life policy and wanting to know what they'll actually keep. The practical note worth carrying away is to ask the insurer for the numbers before cashing out, so the tax hit isn't a shock.