Capital Gains

What Does Capital Gains Mean?

Capital gains refer to the profit earned from the sale of a capital asset, such as bonds, stocks, or real estate, where the sale price exceeds the original purchase price. The difference between the purchase and sale prices is the amount of capital gains.

In the context of insurance, the cash value and death benefits from life insurance policies are not considered capital gains. However, if a life insurance policy is sold to another person, the proceeds from that sale would be subject to capital gains tax, as the transaction involves the sale of a capital asset. For a fuller breakdown of when payouts and surrenders are or aren’t taxed, see our guide on whether life insurance is taxable.

Insuranceopedia Explains Capital Gains

Since capital gains are subject to tax, it is crucial for a policyholder to understand the regulations governing their life insurance policy and any proceeds derived from it. If a policyholder decides to sell their life insurance policy for a profit, the proceeds must be declared as capital gains, and the appropriate taxes must be paid.

However, if the policyholder transfers the rights to the policy without receiving any consideration (i.e., without receiving payment or anything of value in return), this would not be classified as capital gains and, therefore, would not be subject to capital gains tax. Understanding these distinctions is key to ensuring compliance with tax laws.

The tax treatment also depends on the type of policy involved. Permanent policies that build cash value over time, such as whole life, are more likely to come into play in these transactions than term policies, which have no cash value to sell. You can compare which life insurance policies generate cash value to see how different policy types work.