Life Insurance Purchased from Plan

[Buckoosier]

A participant bought a life insurance policy from a plan several years ago. During the time the policy was in the plan, he paid income tax against the "PS 58 cost" portion of the premium each year. Several years later he cashed out the policy, and there is now gain (relative to the original exchange price) that will now be taxed. For purposes of determing the gain, is the participant's cost basis the exchange price, or is it the exchange price plus the sum of the PS 58 costs?

[Bird]

I don't think PS-58 cost basis would transfer with the policy so the cost basis is simply the purchase price.

I seem to remember that long, long ago, if you didn't take a policy as an actual distribution, you lost your basis, but then there was a ruling or something that said yes you get to keep that basis even if you surrender or sell the policy in the plan, but that's very fuzzy.  In any even, IMO if there is any basis it is in the plan.

[Luke Bailey]

If there is much money involved, you may want to research. Logic would tell you it is just the exchange price, since the PS 58 (actually, Table 1, now) costs were for a noncapital asset, i.e. the transient life insurance benefit. However, when I last looked at this (20+ years ago), it seemed that the rules gave you basis for (what were then) PS 58 costs.

[Larry Starr]

Long ago the IRS changed its rules and allowed the recovery of cost basis even if the contract was transferred out.  I would certainly include the cumulative PS58 in the cost basis; unlikely it would ever be challenged.  "Sometimes it is better to ask for forgiveness than permission!"

Yes, I was the author if the Life Insurance Answer Book, now long out of print.

[Buckoosier]

Thanks you for these comments.