Life Insurance In 403(b) For Retired Participant

[Guest scottyd]

I started working with a client who is now retired (about 5 years) and she was sold a life insurance contract in her 403(b). My understanding is that these policies need to be surrendered at retirement or distributed (by paying income tax on the cash value). Does anyone have more specific details on how to distribute the policy? I assume if the participant wants to simply get rid of the insurance they can exchange the cash value into another 403(b) or roll it into an IRA.

Secondly, the insurance company has been sending a 1099 each year for the pure cost of insurance, how does the payment of taxes over these previous five years on an income not actually receive affect the basis in the policy, if any? In other words, can they subtract the amount they've already paid in taxes from the cash value in order to reduce the amount of taxable income the policy would produce by the nature of it being distributed?

Thanks in advance,

ScottyD