If premiums paid for a policy totaled $5,000 and a $4,000 withdrawal was taken, what is the policy's cost basis?

If premiums paid for a policy totaled $5,000 and a $4,000 withdrawal was taken, what is the policy's cost basis?

• A. $1,000
• B. $9,000
• C. $5,000
• D. $4,000

Answer: (A)

Cost basis is the portion of premiums you have paid into a life insurance policy that can be withdrawn tax-free. When you take a withdrawal, it reduces the remaining unrecovered basis. In this scenario, the policy had 5,000 in premiums paid. A 4,000 withdrawal was taken, so the remaining cost basis is 1,000. Any future withdrawals up to that remaining basis would be tax-free; withdrawals beyond the remaining basis would be taxable as gain.

Cost basis is the portion of premiums you have paid into a life insurance policy that can be withdrawn tax-free. When you take a withdrawal, it reduces the remaining unrecovered basis. In this scenario, the policy had 5,000 in premiums paid. A 4,000 withdrawal was taken, so the remaining cost basis is 1,000. Any future withdrawals up to that remaining basis would be tax-free; withdrawals beyond the remaining basis would be taxable as gain.