Overview

• There are two types of life insurance that accumulate cash value. Whole life insurance has a guaranteed premium, a level death benefit and tables that outline the cash value for each year you own the policy. Universal life policies also accumulate cash value. Universal life policies have flexible premiums, two death benefit options and cash value that varies. Universal life policies also have surrender charges during the first several years you own the policy. You can only borrow or withdraw cash value once it exceeds the surrender charges in the policy.
  
  

Loans

• You don't have to pay any taxes on a policy loan, as long as you pay the loan back. Policies vary in terms of how much of the cash value you can borrow against. If you don't repay the loan, the loan is considered a withdrawal and you owe taxes if your withdrawal exceeds the amount of premiums paid. If you don't repay the loan, the loan amount, and the interest that's accumulated since you took out the loan, are deducted from the death benefit that goes to your beneficiaries.
  
  

Withdrawal

• Universal life policies allow you to withdraw money from the policy. To make a withdrawal, your cash value has to exceed the amount of the policy's surrender charges. If you withdraw more from the policy than what you've paid in premiums, you will owe income taxes on the difference. If your policy is a Modified Endowment (your policy will state whether this is the case), you may also incur an early withdrawal penalty if you withdraw more than you've paid into the policy.
  
  

Surrender

• You can also withdraw funds from your life insurance policy by surrendering the policy. Surrendering the policy means you end the policy. You receive any cash value within the policy, after surrender charges, and you no longer owe premiums. As with other withdrawal options, you may owe income taxes if you withdraw more than you've paid into the policy. Surrendering your policy is drastic, and you lose your death benefit. Carefully review all the options available before you surrender your policy.