Can You Withdraw Money From a Whole Life Insurance Policy?

Whole life insurance is a type of permanent life insurance that provides coverage for the insured person’s entire life. It includes a cash value component that grows tax-deferred and can be accessed by policyholders. The cash value offers a flexible resource for various financial needs, though the primary purpose remains the death benefit for beneficiaries.

Ways to Access Cash Value

Policyholders can access their policy’s accumulated cash value through several methods, each with distinct implications.

Policy Loan

A policy loan involves borrowing money from the insurer, with the policy’s cash value serving as collateral. The policy remains in force, and the cash value continues to grow, though interest accrues on the borrowed amount. Repayment is optional, but any outstanding loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries.

Cash Withdrawal

A cash withdrawal directly takes money from the policy’s cash value. Unlike a loan, a withdrawal permanently reduces the policy’s cash value and the death benefit. If the amount withdrawn exceeds the total premiums paid (cost basis), the excess may be subject to income tax.

Policy Surrender

A policy surrender involves terminating the insurance coverage entirely to receive the cash surrender value. This ends all benefits and coverage. The cash surrender value is the accumulated cash value minus any applicable surrender charges and outstanding loans. Any gain realized from the surrender (amount received in excess of premiums paid) is taxable as ordinary income.

Key Considerations Before Accessing Cash Value

Before accessing a whole life insurance policy’s cash value, understand the potential consequences for the policy and your financial situation. Each access method can alter the policy’s long-term value and benefits.

Impact on Death Benefit

Accessing cash value directly impacts the death benefit. For policy loans, any unpaid loan balance and accrued interest are subtracted from the death benefit. Cash withdrawals directly reduce the policy’s cash value, leading to a proportional reduction in the death benefit. A policy surrender eliminates the death benefit entirely, as the policy is terminated.

Tax Implications

Tax implications vary by access method. Policy loans are generally not taxable income as long as the policy remains in force. However, if a policy lapses or is surrendered with an outstanding loan, the borrowed amount exceeding premiums paid could become taxable. Cash withdrawals are tax-free up to the premiums paid (cost basis); any amount beyond this is taxable as ordinary income. When a policy is surrendered, any gain (cash surrender value exceeding total premiums paid) is subject to ordinary income tax.

Risk of Policy Lapse

Accessing cash value can increase the risk of policy lapse. If a substantial loan’s balance plus accrued interest exceeds the remaining cash value, the policy could terminate. Significant withdrawals can deplete cash value, preventing it from covering ongoing policy charges or premiums, leading to a lapse in coverage. A lapsed policy means the loss of all benefits.

Interest Accrual

Interest accrues on policy loans, typically at rates ranging from 5% to 8%. This interest can be paid periodically or added to the outstanding loan balance. If interest is not paid, it compounds, increasing the total loan amount and further reducing the policy’s cash value and eventual death benefit. Uncontrolled loan growth can also heighten the risk of policy lapse.

Future Premium Payments

Accessing cash value may affect future premium payments. If a significant portion is borrowed or withdrawn, it might require continued out-of-pocket payments, impacting financial liquidity. Monitor the policy’s remaining cash value to ensure it can support future premium obligations.

Initiating the Cash Value Access Process

After evaluating methods and implications, initiating the cash value access process involves several steps. Adhering to insurer requirements ensures a smoother process.

Gather Information

Gather essential policy information: original documents, policy number, current cash value, and any outstanding loan balances. Many insurers provide online portals or statements for review. This information streamlines communications.

Contact the Insurer

Contact the insurance company via customer service, online portal, or a financial advisor. State your intent to access cash value and request specific forms for a loan, withdrawal, or surrender.

Review Forms

The insurer will provide necessary forms and detailed instructions. Review all instructions carefully to understand required information and supporting documentation.

Complete Paperwork

Complete paperwork accurately, specifying the desired amount, preferred fund receipt method (e.g., direct deposit), and signing as required. Submit forms to the insurance company via mail, fax, or online portal.

Process Request

After submission, the insurance company will process the request. The timeframe for receiving funds varies, often ranging from a few business days to a couple of weeks, depending on the insurer and disbursement method. Direct deposits are generally faster than mailed checks.

Retain Records

Retain copies of all submitted documents and confirmation notices for future reference, tax purposes, and to verify correct processing. This documents the updated policy status.