52 / If a life insurance policyholder elects to receive endowment maturity proceeds or cash surrender values under a life income or installment option, is the gain on the policy taxable to the policyholder in the year of maturity or in the year of surrender?

Ordinarily, a cash basis taxpayer is treated as having constructively received an amount of cash when it first becomes available to the taxpayer without substantial limitations or restrictions. The taxpayer must report this amount as taxable income even though the taxpayer has not actually received it.¹ When an endowment contract matures, or any type of contract is surrendered, a lump-sum payment generally becomes available to the policyholder unless, before the maturity or surrender date, the taxpayer has elected to postpone receipt of the proceeds under a settlement option. For an exception to this general rule, see Q 588.

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1.     Treas. Reg. § 1.451-2.

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