Process

• You must contact the insurance company when you want to cash in your policy. This is because many whole life policies offer an automatic premium loan function. This function automatically draws money from the cash value to pay premiums if you fail to pay premiums on the policy. Therefore, you shouldn't rely on just stopping your premium payments to terminate your policy.
  
  

Significance

• You get an amount equal to the "net cash value" of the policy. This is sometimes referred to as the "net surrender value" or "net cash value." This amount represents the gross cash value amount less any surrender charges in the policy. A surrender charge is a charge that the insurer charges for cashing in the policy prior to a specific date. You also pay income taxes on any gains in the policy. A gain is any amount in excess of the total premiums you've paid into the policy.
  
  

Benefit

• The benefit of cashing in your whole life policy is that you get the money in your policy for whatever your needs are. There are no IRS penalties and no other penalties or restrictions outside of the surrender charge. Moreover, while you pay taxes on any gains, you do not pay tax on an amount equal to your total premium payments. This means that you may end up paying far less in taxes than you think.
  
  

Consideration

• Before cashing in your whole life, consider keeping it. You can take tax-free policy loans and keep the policy in force. Alternatively, you may exchange the policy for an annuity contract using a 1035 exchange. This exchange is income tax-free and gives you the benefit of an insurance policy (the annuity) that can be later used to guarantee you a retirement income. You lose your whole life policy along with the tax-free withdrawal benefit of the insurance policy, but you don't have to pay premiums anymore.