Guides › Life Insurance Decisions
Updated July 31, 2026. Quick answer: your cost basis is premiums paid, minus dividends you took in cash or used to reduce premiums, minus prior tax-free withdrawals. Two corrections to the versions you will read elsewhere: dividends that bought paid-up additions do NOT reduce basis (they went back into the contract — they net to zero), and since the 2017 tax act you do NOT reduce basis by the “cost of insurance” — Congress reversed that rule retroactively (TCJA §13521, amending IRC §1016(a); see Rev. Rul. 2020-05), so basis really is what you put in, net of what you took out.
Where to get the real numbers
Do not reconstruct decades of premiums from memory — call the carrier and ask for the “investment in the contract” figure; they track it because they must report your gain on Form 1099-R at surrender. Ask specifically: total premiums paid, total dividends paid and how each was applied (cash / premium reduction / paid-up additions), and total prior withdrawals. If you inherited or were gifted the policy, or bought it from someone, your basis follows different rules — get advice before relying on the carrier’s figure.
With basis in hand: the surrender tax calculator turns it into your actual after-tax number, and if you are weighing a sale instead, basis is also tier one of the settlement three-tier rule.
Basis is the number every exit is priced against.
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