Partial Withdrawal of Life Insurance Policy: How it works

What is partial withdrawal from a life insurance policy?

Permanent policies like whole life and universal life build up cash value. For many life insurance policyholders, a policy accrues a fairly sizable amount of cash value over time, almost like a savings account.

The more premiums paid in and the better the rate of return on the cash value account you invest, the more the cash value increases. In some situations, cash value can be taken out in two ways: a withdrawal or a loan.

A withdrawal is taking out your own premiums paid into the policy which is called “the basis”.

Loans can be taken out interest-free and you can pay yourself back the money – or, the loan or withdrawal is subtracted from your death benefit if you die with any outstanding owed on the loan. The situation you choose depends on the details of your life insurance plan.

Rather than just canceling outright if money is needed, policyholders have some options to withdraw funds or even sell their policy to a life settlement company. These options are best exercised if a policyholder has retained the same plan for many years. Depending on the age of your policy, drawing money out may leave you in a negative cash value situation, so it’s best to know your terms.

What is Partial Withdrawal with regard to life insurance?

Partial withdrawal refers to cashing out part of a life insurance policy, at which time the policy will stay in force (i.e. is not canceled). Taking direct cash out of your policy almost always has an impact on overall value; both in terms of total value and the death benefit amount left.

Partial withdrawal won’t be taxed as long as the policy remains in force. Essentially, you are taking out your contributed premiums in a withdrawal – and if you get into gains you have to take it out as a loan, particularly in the initial 15 years that you’re paying in. A withdrawal will not increase or change the premiums. There are no penalties for a withdrawal – only for a full life insurance policy surrender, and typically only if you cancel the policy within its first 10 years.

Why would someone withdraw?

There are many situations – there is a strategy called a LIRP that can allow you to receive taxable income from your life insurance’s cash value to supplement retirement.

Many people opt to partially cash out policies over time. The reasons vary as widely as all the various reasons anyone might need money — and after all, it is your money!

Because a term life policyholder is simply “leasing” their policy from the insurance company, there is no cash value attached to the policy itself — so if you’re looking for an option to initiate partial withdrawal when needed, it’s best to avoid term life policies and go with a type of policy that has a cash value component assignment. However, term life insurance IS becoming more flexible over time with different options and add-ons.

If you have questions about the availability of partial withdrawal based on your plan and want to talk strategy, we can help! Reach out and let’s discuss a cash value life insurance solution that works for you and your family.