The two most common methods for accessing money from your policy are cash withdrawal and policy loans. Each method comes with unique rules and tax consequences. A cash withdrawal from a Whole Life insurance policy is typically achieved by surrendering Paid-Up Additions (see “Paid-Up Additions”) that have accumulated over time. The surrender of Paid-Up Additions is considered to be a “Partial Surrender” (see “Partial Surrender”), which is a disposition for tax purposes and will result in taxes payable in most cases. Note: if dividends were set to cash accumulation, then cash withdrawals would come from that account rather than the surrender of Paid-Up Additions.
Once money is withdrawn or removed from the policy, it cannot be replaced or paid back, so the transaction is final. This will, of course, reduce the cash value in the policy but will also affect the future growth of the policy. Also, it should be noted that because a portion of the Paid-Up Additions are being surrendered to provide you with your cash, your death benefit will be reduced by an amount greater than the actual amount of the cash withdrawal. Each Paid-up Addition holds its own guaranteed cash value, which corresponds to an amount of death benefit typically larger than its guaranteed cash values.
It is for all these reasons that we would advise accessing your money needed on an ongoing basis through policy loans, instead of cash withdrawal, allowing the full amount of your cash values to keep growing over time. Your advisor should be able to assist in choosing the best way to proceed.