Can I Withdraw Money From My Whole Life Insurance?

Whole life insurance is a type of permanent life insurance that provides coverage for the policyholder’s entire life. A key feature is its ability to accumulate cash value over time, alongside the death benefit. This cash value grows on a tax-deferred basis, meaning earnings are not taxed annually while remaining within the policy. The cash value acts as a savings element that policyholders can access during their lifetime, distinct from the death benefit paid to beneficiaries upon the policyholder’s passing.

Methods for Accessing Cash Value

Policyholders have several ways to access the accumulated cash value within a whole life insurance policy.

A policy loan allows the policyholder to borrow money from the insurer, using the cash value as collateral. The policy remains in force, and the cash value continues to grow, though interest accrues on the outstanding loan balance. Any unpaid balance, including accrued interest, will reduce the death benefit paid to beneficiaries.

A cash withdrawal directly removes a portion of the accumulated cash value. Unlike a loan, a withdrawal does not need to be repaid, but it permanently reduces both the policy’s cash value and its death benefit. This also means less cash value remains to grow.

Surrendering the policy terminates the insurance coverage entirely. The policyholder receives the cash surrender value, which is the cash value minus any applicable surrender charges or outstanding loans. Upon surrender, the death benefit is eliminated, meaning no payout will be made to beneficiaries.

Tax Implications of Accessing Funds

Accessing the cash value of a whole life insurance policy carries specific tax implications depending on the method chosen.

Policy loans are generally not considered taxable income as long as the policy remains in force. The Internal Revenue Service (IRS) views a policy loan as a debt against the policy’s value, rather than a distribution of earnings. However, if the policy lapses or is surrendered with an outstanding loan, the amount of the loan that exceeds the policy’s cost basis may become taxable as ordinary income. The cost basis refers to the total premiums paid into the policy, less any prior tax-free withdrawals or dividends received.

Cash withdrawals are generally tax-free up to the policyholder’s cost basis. Any amount withdrawn that exceeds this cost basis is taxable as ordinary income. This “first-in, first-out” (FIFO) rule means the IRS considers initial withdrawals a return of premiums paid, which are not taxed again. Only after total withdrawals surpass cumulative premiums paid do earnings become subject to taxation.

When a whole life insurance policy is surrendered, any gain realized is taxable as ordinary income. The gain is calculated as the cash surrender value received minus the policy’s cost basis. For example, if premiums paid totaled $50,000 and the surrender value is $80,000, the $30,000 difference would be taxable. Tax obligations arise even if the policy’s cash value is used to repay an outstanding loan upon surrender or lapse.

Impact on Policy Benefits

Accessing the cash value of a whole life insurance policy has direct consequences on its benefits beyond tax implications.

If a policy loan is taken and not fully repaid, the outstanding loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries. Cash withdrawals also permanently reduce the policy’s cash value and, consequently, the death benefit.

Accessing funds affects the policy’s remaining cash value and its future growth. Any amount borrowed or withdrawn reduces the principal on which future cash value growth and potential dividend payments are based. A smaller remaining cash value balance can lead to slower accumulation over time, potentially impacting the policy’s long-term financial utility.

A significant risk with outstanding policy loans is the potential for the policy to lapse. If the loan balance, along with accumulating interest, grows to exceed the policy’s cash value, the policy can terminate if the policyholder does not take corrective action, such as repaying the loan or paying additional premiums. A policy lapse results in the complete loss of insurance coverage and can trigger immediate tax liabilities on any gains, even if no cash is received by the policyholder.

Initiating a Cash Value Request

To access the cash value from a whole life insurance policy, policyholders must follow a process.

Preparing Your Request

First, gather necessary information. This includes having your policy number and personal identification details ready. You should also decide on the specific access method (loan, withdrawal, or surrender) and the exact amount desired, considering policy benefits and tax consequences.

Contacting Your Insurer

Next, contact the insurance company that issued the policy. You can initiate a request by calling customer service, accessing an online portal, or sending a written request. Insurers provide specific forms that must be completed accurately.

Submission and Disbursement

The submission process requires completing and signing the appropriate forms. Additional documentation, such as identification, may be needed depending on the request. After submission, the insurer processes the request, which can take several business days to a few weeks. Funds are disbursed via direct deposit or check. You should receive confirmation once the request is processed and funds disbursed.