If a policyowner surrenders a whole life policy for its cash value, any amount received above the total premiums paid (the cost basis) is:

Explanation

On surrender, the gain (cash value received minus the cost basis of premiums paid) is taxed as ordinary income, not as a capital gain. It is not tax-free, and it must be reported. The portion equal to the premiums paid is a tax-free return of basis. This is a common exam point: living gains from life insurance and annuities are ordinary income, never capital gains, even though the underlying growth felt like an investment return.