What does the term "cost basis" in life insurance generally refer to?

The term "cost basis" in life insurance generally refers to the amount of premiums paid into the policy minus any dividends received or other forms of return of premium. This calculation is crucial for determining the tax implications when a policy is surrendered or matures. The cost basis establishes how much has been invested into the policy by the policyholder, which is essential for determining any taxable gains that may occur when the policy is terminated.

Understanding cost basis is important for policyholders because it provides clarity on what portion of the payout they may have to report as income for tax purposes. When a policy is surrendered, the gain is calculated by subtracting the cost basis from the total amount received upon surrender. Therefore, knowing the cost basis can help policyholders make informed financial decisions regarding their life insurance policies.

The other options do not accurately capture the concept of cost basis. While the insurer's claims payment or the face value of the policy pertains to the benefits of the insurance, they do not represent what the policyholder has invested. Interest accumulated on the policy is relevant in different contexts, such as determining cash value, but does not define the cost basis in the way that premium payments and dividends do.