Can You Pull Money Out of Your Life Insurance?

Life insurance primarily offers financial protection to beneficiaries upon the policyholder’s passing. Certain types of life insurance policies include a “cash value” component. This cash value is a living benefit that grows over time and may be accessed by the policyholder during their lifetime, unlike the death benefit. Not all life insurance policies build cash value, and the ability to access funds depends on the specific policy structure.

Life Insurance Policies That Build Cash Value

Cash value in life insurance refers to a savings or investment component within a permanent life insurance policy. A portion of each premium payment contributes to this cash value, which then accumulates over time, often on a tax-deferred basis. This accumulated value provides a resource policyholders can use. The way cash value grows depends on the specific policy type.

Whole life insurance is a permanent policy with cash value growing at a guaranteed rate. Premiums are fixed, with a portion allocated to the cash value, which grows predictably. Cash value can also increase if the insurer pays dividends on participating policies and these are reinvested.

Universal life (UL) insurance offers more flexibility than whole life, allowing adjustment of premium payments and death benefits. The cash value grows based on interest rates set by the insurer or linked to market performance, with a guaranteed minimum. Sufficient cash value may allow policyholders to lower or even skip premium payments.

Variable universal life (VUL) insurance combines a death benefit with an investment component. The cash value is invested in various subaccounts. Its growth or decline is directly tied to investment performance. Indexed universal life (IUL) is another variant where cash value growth is tied to a stock market index, with a floor and a cap on returns.

In contrast, term life insurance policies do not build cash value. These policies provide coverage for a specific period and have lower premiums than permanent policies. Term life focuses solely on providing a death benefit, thus no cash value to access.

Methods for Accessing Cash Value

Policyholders have several ways to access the cash value built up within their permanent life insurance policies. These methods include taking a policy loan, making a cash withdrawal, or surrendering the policy entirely. Each option has a distinct process for initiation and completion.

Taking a policy loan involves borrowing money. To initiate a loan, the policyholder contacts their insurance provider. The insurer confirms eligibility and the available loan amount, a percentage of the accumulated cash value, before processing.

A cash withdrawal allows taking a portion of the accumulated cash value. A withdrawal request form is completed. A withdrawal reduces the policy’s cash value and, consequently, the death benefit. The insurer confirms the impact on the policy before processing.

Policy surrender involves terminating the life insurance policy in exchange for its cash surrender value. The policyholder notifies the insurance company to surrender. The insurer calculates the cash surrender value as accumulated cash value minus any outstanding loans, unpaid premiums, and applicable surrender charges.

Financial and Policy Impacts of Accessing Cash Value

Accessing the cash value of a life insurance policy carries specific financial and policy implications that policyholders should carefully consider. These consequences vary depending on the method used to access the funds, affecting the policy’s death benefit, future cash value growth, and potential tax obligations.

When a policyholder takes a policy loan, the loan accrues interest. Any outstanding loan balance reduces the death benefit paid to beneficiaries. If the loan and its interest exceed the policy’s cash value, the policy can lapse. Policy loans are not considered taxable income as long as the policy remains in force and is not classified as a Modified Endowment Contract (MEC).

Cash withdrawals reduce the policy’s cash value and, consequently, the death benefit. Unlike loans, withdrawals remove funds from the policy. Withdrawals are tax-free up to the amount of premiums paid into the policy, a return of basis. However, any portion exceeding the total premiums paid may be subject to income tax.

Surrendering a policy terminates all coverage and provides the cash surrender value to the policyholder. Insurance companies may levy surrender charges. Tax implications involve comparing cash surrender value received to total premiums paid. If the cash surrender value exceeds the total premiums paid, the difference is considered a taxable gain and is subject to ordinary income tax.