Replacement Tax Ramifications?

I replaced a 38 year old NYLI 5k policy last week with a new 5K policy. The lady is getting a check for $3,797.00 which was her cash value. NYLI sent her a cash distribution form with a serious sounding warning about her having to pay $790 in income tax when she receives the money.

Is that true. she is retired and makes $750 per month. Her reason to replace is to use the cash to remodel her bathroom. Her old payment was $10 per month her new payment is $37 per month. she is 74 years old and very healthy.

And yes I know I should know the answer because I sell life insurance. I mu
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