Can You Withdraw Money From Universal Life Insurance?

Universal life (UL) insurance represents a form of permanent life insurance coverage. This type of policy incorporates a unique savings component, often referred to as cash value, which accumulates over time. Policyholders benefit from the ability to adjust premium payments and, in some instances, death benefits, providing a degree of financial adaptability. The cash value within a universal life policy develops separately from the death benefit, serving as an accessible financial resource during the policyholder’s lifetime.

Understanding Universal Life Insurance Cash Value

A distinguishing characteristic of these policies is the inclusion of a cash value component, which grows over the policy’s lifespan. This cash value is a separate fund that accumulates within the policy, distinct from the death benefit paid to beneficiaries.

The growth of this cash value is influenced by several factors. A portion of each premium payment, after deductions for the cost of insurance and administrative fees, is allocated to this cash value account. The cost of insurance, which covers mortality charges and policy administration, typically increases with the policyholder’s age.

The cash value also earns interest, contributing to its accumulation. While some universal life policies offer an interest rate tied to current money market rates, others might link growth to a stock market index, subject to certain caps and floors. Regardless of the method, policies generally include a guaranteed minimum interest rate, ensuring some level of growth.

Methods of Accessing Policy Value

Policyholders have two primary mechanisms for accessing the accumulated cash value within a universal life insurance policy: direct withdrawals and policy loans.

A withdrawal directly removes funds from the policy’s cash value. This action permanently decreases the policy’s cash value, and unlike a loan, these funds are not expected to be repaid to the policy. The availability and maximum amount of a withdrawal depend on the policy’s terms and the amount of cash value accumulated.

In contrast, a policy loan allows the policyholder to borrow money using the cash value as collateral. The policy’s cash value itself is not directly diminished, but rather, the insurer lends money against it. Policy loans typically accrue interest, and the policyholder is expected to repay both the principal and interest. The loan amount can be repaid over time, or it can remain outstanding, with the unpaid balance and accrued interest reducing the death benefit paid to beneficiaries upon the insured’s passing.

Implications of Accessing Policy Value

Accessing the cash value of a universal life insurance policy, whether through withdrawals or loans, carries several implications that policyholders should carefully consider. These actions can affect the policy’s death benefit, its ability to remain in force, and may have tax consequences.

A withdrawal directly reduces the policy’s cash value, which can subsequently decrease the death benefit payable to beneficiaries. If the amount withdrawn exceeds the premiums paid into the policy (the “cost basis”), the excess portion may be considered taxable income. For instance, if a policyholder paid $10,000 in premiums and withdraws $12,000, the $2,000 gain could be subject to income tax. Unplanned or excessive withdrawals can also deplete the cash value to a point where it can no longer cover policy charges, potentially leading to the policy lapsing.

Policy loans, while generally not considered taxable income at the time they are taken, can also impact the death benefit. Any outstanding loan balance, plus accrued interest, will be subtracted from the death benefit paid to beneficiaries. If a policy lapses with an outstanding loan, the loan amount that exceeds the policy’s cost basis could become immediately taxable. This is particularly relevant if the policy is classified as a Modified Endowment Contract (MEC) under Internal Revenue Code Section 7702A, where loans are treated first as taxable gains, similar to withdrawals from an annuity.

The risk of policy lapse increases if the cash value, reduced by withdrawals or encumbered by loans, becomes insufficient to cover ongoing policy charges, such as the cost of insurance and administrative fees. Insurers typically provide a grace period, often 30 or 31 days, after a missed payment before a policy lapses. To prevent a lapse, policyholders may need to resume premium payments or inject a lump sum to restore the cash value.

Requesting Access to Policy Value

When a policyholder decides to access the cash value from their universal life insurance policy, the process typically begins by contacting the insurance provider. This initial contact can be made through various channels, such as a phone call to the customer service department, an email, or by visiting the insurer’s website for online service options.

Policyholders will generally need to provide their policy number and verify their identity. They will also specify the exact amount they wish to withdraw or borrow. Depending on the insurer and the amount requested, additional documentation might be required, such as a signed request form or a notarized signature.

Many insurance companies have dedicated forms for cash value withdrawals or policy loan requests, which can often be downloaded from their website or mailed directly to the policyholder. These forms require details like the requested amount, the preferred method of payment (e.g., direct deposit or check), and confirmation of understanding the implications of the transaction. The processing time for these requests can vary, typically ranging from a few business days to a couple of weeks, once all required paperwork is accurately submitted.