How to Get Cash Value From a Whole Life Policy

Whole life insurance includes a savings component known as cash value, which grows over time on a tax-deferred basis. This cash value provides a financial resource policyholders can access during their lifetime. This article explores the various methods available for accessing cash value from a whole life insurance policy.

Ways to Access Policy Cash Value

Whole life insurance policies build cash value that can be accessed through several methods, each with unique implications for the policy and its death benefit. These options allow policyholders to use their accumulated value for various needs.

Policy Loan

One common method is taking a policy loan, which involves borrowing funds directly from the insurer, using the policy’s cash value as collateral. The cash value remains within the policy, continuing to grow, and the loan amount typically does not appear on credit reports. Interest accrues on the outstanding loan balance, and if the loan is not repaid, it will reduce the death benefit. Policyholders can make periodic payments, a lump sum repayment, or allow the outstanding amount to be deducted from the death benefit. A policy loan application form is typically required.

Partial Surrender

Another way to access funds is through a partial surrender, or withdrawal. This involves taking a portion of the cash value, which directly reduces the policy’s cash value and often the death benefit. Unlike a loan, a withdrawal permanently removes money and does not need repayment. However, excessive withdrawals can lead to the policy lapsing if the remaining cash value becomes insufficient to cover policy charges. A withdrawal request form is generally needed.

Full Surrender

A policyholder can choose a full surrender, terminating the entire whole life policy to receive its net cash surrender value. Upon full surrender, insurance coverage ceases, and the death benefit is no longer in force. The cash surrender value is the accumulated cash value minus any surrender charges or outstanding loans. These charges often decrease over time, meaning policies surrendered in later years may incur lower fees. A surrender request form is necessary to cancel the policy and receive the cash value.

Premium Payments

Policyholders can use their cash value to cover ongoing premium payments. This can be done through a Reduced Paid-Up (RPU) option, where cash value purchases a smaller, fully paid-up whole life policy, eliminating future premiums while maintaining a reduced death benefit. An Automatic Premium Loan (APL) provision is another option, where the insurer automatically takes a loan from the cash value to cover a missed premium, preventing policy lapse. Both options utilize cash value to keep the policy in force without out-of-pocket payments, though they impact the policy’s future death benefit or cash value growth.

Tax Treatment of Cash Value Access

Different methods of accessing whole life policy cash value have varying tax consequences. The general rule centers on “cost basis,” which is the total amount of premiums paid into the policy. Only gains, meaning cash value exceeding this cost basis, are subject to taxation.

Policy Loans

Policy loans are not considered taxable income as long as the policy remains in force. The Internal Revenue Service (IRS) views these as loans, not withdrawals of earnings. However, if a policy with an outstanding loan lapses or is surrendered, the outstanding loan amount, to the extent it exceeds the policyholder’s cost basis, becomes taxable as ordinary income.

Partial Surrenders

For partial surrenders or withdrawals, funds are generally treated on a “first-in, first-out” basis. This means withdrawals are considered a return of the policyholder’s cost basis first and are tax-free up to that amount. Any amount withdrawn exceeding the cost basis is considered a gain and is subject to ordinary income tax.

Full Surrender

When a whole life policy is fully surrendered, the difference between the cash surrender value received and the policyholder’s total premiums paid (cost basis) is considered taxable income. This gain is taxed at ordinary income rates, not capital gains rates, and can increase the policyholder’s tax liability for the year of surrender. Insurers issue a Form 1099-R for taxable amounts received upon surrender.

Premium Payments

Using cash value to pay premiums, such as through a reduced paid-up option or an automatic premium loan, does not trigger an immediate taxable event. However, if a policy with an outstanding automatic premium loan eventually lapses, the loan amount exceeding the cost basis could become taxable, similar to other policy loans. Given the complexity of tax laws and individual financial situations, consulting a qualified tax professional is always advisable before accessing cash value.

Steps to Request Cash Value

After deciding on the appropriate method for accessing cash value, the next step is to formally request funds from the insurance company. This process ensures accuracy and compliance with policy terms.

First, contact the insurance provider. Policyholders can reach their insurer through a customer service phone line, online policyholder portal, or their assigned insurance agent. Having the policy number available will facilitate this initial communication.

During this contact, clearly state your intention to access the cash value and specify the chosen method (e.g., policy loan, partial withdrawal, or full surrender). The insurer will then guide you on the specific forms required for the transaction.

Once the required form is obtained, complete it accurately and thoroughly, providing all requested personal and policy details. After completion, submit the forms, along with any necessary supporting documentation, to the insurance company. Common submission methods include mailing, uploading through a secure online portal, or fax.

Following submission, anticipate a processing period. The insurance company will confirm receipt and provide an estimated timeframe, which can vary. Funds are usually disbursed via check or electronic funds transfer to a designated bank account.