Early Withdrawal From A Life Insurance Policy

One of the primary selling points of a permanent life insurance policy is that it will build a cash value. The money in the cash value account can typically be accessed through loans, withdrawals or by surrendering some, or all, of the policy. Not all accounts allow withdrawals, so it is something that should be discussed with your insurance representative.

Function

When premium payments are made on permanent life insurance policies, a portion of the money goes to pay for the death benefit of the policy. The remaining money is put into an investment or savings account after the insurance company deducts expenses. These accounts are typically referred to as the cash value of the policy.

Features

Withdrawals from life insurance policies tend to be tax free up to the amount you have paid in premiums, minus any previous loans or dividend payments you have received. Modified endowment contract policies are different, however, in that money that is designated taxable income is withdrawn first. Very few people will pay enough in premiums to reach modified endowment contract status.

Considerations

Taking a withdrawal from your life insurance policy could have several adverse effects to your policy. A withdrawal could reduce the death benefit of the policy or could cause premiums to increase in order to keep the death benefit amount at the same level.

Effects

The money in your cash value account may be obtained by a surrender of the policy, although doing so will leave you without life insurance. Additionally, any net gain in the cash value account will be subject to taxation and the insurance company may impose a surrender charge.

Alternatives

If making a withdrawal will have a negative effect on the death benefit, it may be worth looking into taking out a loan from the insurance company. The cash value of your policy is essentially used as collateral for the loan amount. The interest charged on a life insurance policy loan is not tax deductible and any unpaid loan amounts will be taken from the death benefit of the policy.