When you purchase a permanent life insurance plan, such as whole life, universal life or variable life, there is an additional savings element built into your policy. A portion of your premium payment is put into an additional account and draws interest. In time, the life insurance policy will build a cash value, which can be accessed by the policy holder several different ways, including by surrendering, or canceling, the policy.
Function
Permanent life insurance policies build cash value at a slow rate for the first 3-5 years. But after a few years, the cash value increases at a faster rate. The cash value of a policy can be used to cover future premiums, borrowed against or withdrawn. The policy holder may also access the cash value by surrendering the policy for its cash surrender value.
Benefits
The cash value of a life insurance policy will grow tax free as long as the earnings from the account do not exceed the amount of premiums you have paid. If your policy is worth more than what you have paid in premiums the excess amount of money from surrendering your policy will be taxed at your regular tax rate.
Considerations
Some insurance policies will have a surrender charge, which is a fee that will be deducted from your money before it is sent to you when you surrender your policy.
Warning
A loan taken out against a permanent life insurance policy may be taxable when you surrender your policy. Any money borrowed in excess of your premium payments will be taxable.
Theories/Speculation
Surrendering a permanent life insurance policy will yield you cash, provided you've had the policy for more than one year, but will leave you without coverage. Another possible way to access the cash value of your policy is to borrow against it. The loan would not be tax deductible as long as the loan is repaid. Interest on the loan is not tax deductible, but will likely be lower than you would get from a commercial lender.
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