Partial Surrender of Life Insurance: Loans vs. Withdrawals

Life insurance policy owners who possess permanent plans are likely to have built up a significant amount of savings within their policies.

This is especially the case for those who have held their policies for a long period of time.

In order to access the cash that is inside of a permanent life insurance policy, there are two options (other than simply canceling the policy altogether).

These include making a cash withdrawal or taking out a policy loan.

Prior to removing your funds from the policy, however, it is important to determine the difference between exactly what is a life insurance policy loan versus a withdrawal – because there is definitely a difference.

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Before you make any decisions about the cash value inside the plan, it’s important that you understand the differences and disadvantages of each route.

It can have a major impact on your life insurance policy and the coverage that it provides.

This article is going to explore those two options and give you the information that you need to provide the best life insurance for your family.

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Understanding Policy Loans vs. Withdrawals

When it comes to the cash value in a life insurance policy, a loan – one that possesses either a standard or a variable interest rate – will not reduce the value of your cash account.

When you take out a policy loan, your policy account value will instead be held as collateral for the loan and will, therefore, be held subject to the available cash surrender value.

Should, however, the insured pass away prior to the time that the full amount of the policy loan has been repaid, there will be a reduction in the death benefit, based on the amount of the unpaid loan balance.

A policy withdrawal, on the other hand, is considered to be a partial surrender of the net cash value.

This will essentially result in a reduction of the policy’s death benefit amount – as well as the amount of the cash value account in the policy.

While policy owners are allowed to withdraw funds from the cash value component of a permanent life insurance policy – subject to the amount of the available funds that are in the account – a withdrawal that exceeds the number of cumulative premiums that have been deposited can be taxed.

Therefore, it is important to note that any interest that is earned will be credited to the account value in the cash value component of the policy – and, by taking even a partial amount of cash withdrawal, the policy owner can be lowering the amount of the cash to which such interest can be earned.

Important Considerations Prior to Removing Funds From a Life Insurance Policy

person collecting cash from life insurance policy withdrawalWhen considering a life insurance policy withdrawal, it is important to factor in several important criteria that could have an effect on one’s tax situation, as well as the amount of death benefit that may (or may not) be received by survivors.

For example, a cash value withdrawal may not always be a tax-free event.

Oftentimes, if a policy owner takes a withdrawal within the first 15 years of the policy and the withdrawal causes a reduction of the death benefit amount, then some – or even all – of the withdrawal amount may be subject to income tax.

Depending on the amount of the withdrawal, it could also reduce the amount of the death benefit such that survivors will not have enough funds to pay final expenses, anticipated debts, or ongoing living expenses that they were counting on from such proceeds.

In addition, many people do not realize that cash value withdrawals could also cause the policy’s premiums to rise in order to maintain the same amount of policy death benefit. If the higher premium is not paid, the policy is likely to lapse.

When taking funds from the policy as a loan, there are also several factors to consider.

First, while not technically obligated to “qualify” for the loan proceeds, the policy loan may still be subject to varying rates of interest.

In addition, the amount that the policy owner is allowed to borrow may actually be based on the value of the cash account, as well as the terms that are outlined in the life insurance contract.

Certain types of policies that are considered to be modified endowment contracts, or MECs, may also consider loan proceeds to be policy distributions.

If this is the case, the policy owner may be subject to an “early withdrawal” penalty of 10% of the proceeds.

They may also be required to pay income tax on the proceeds – even though the funds are borrowed and not withdrawn.

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If the policy owner opts to simply surrender the policy altogether and cancel it, this is certainly another option for obtaining the cash.

This also requires some consideration, however, as during the early years of the policy, there may be surrender charges involved.

In addition, any of the gains on the cash may also be subject to income tax.

This option will also eliminate the insured’s death benefit coverage as well.

In most cases, surrendering the policy is not the best option.

Not only will you lose some of the cash because of fees, but you also will no longer have life insurance coverage.

It’s vital that your family has the insurance protection that they need.

If you decide that you want to drop the policy to receive the money, it’s important that you purchase another plan.

What To Do After Dropping Your Permanent Coverage

If you’ve decided to surrender your whole life insurance plan, for whatever reason, it’s vital that you get a new life insurance policy.

You never what’s going to happen to you tomorrow, and if you were to pass away, your loved ones would then shoulder the burden of your unpaid expenses, which can easily equal hundreds of thousands of dollars of debt.

If you have decided that these plans are too expensive and you want to get a more affordable policy, then an excellent option is to buy a term insurance plan.

Unlike a whole life insurance plan, these plans have a pre-determined length to them, and then after that point, they are no longer active.

In most cases, they are going to be significantly less expensive than a permanent insurance plan.

One of the best advantages to these plans is that you can buy a plan that matches the length of your insurance needs.

More than likely you won’t need life insurance forever.

You may decide that you only need life insurance coverage until you retire and after that point, you can save money by not having a policy.

Getting Affordable Life Insurance

Regardless of which kind of plan that you have, or how long that you’ve had your insurance plan, there are some ways that you can save money on your life insurance coverage.

A life insurance plan doesn’t have to break your bank every month.

Even if you are still keeping your whole life insurance plan, you can request that the insurance company redo the medical exam.

Firstly, we always suggest cutting tobacco usage.

If you were listed as a smoker on your application, or you’re looking to get more affordable rates through a term insurance plan, the best way to cut your premiums in half is to kick the cigarettes.

Smokers are going to pay twice as much for their coverage versus what a non-smoker is going to pay, which means that if you were a smoker when you bought your life insurance plan, you can save thousands of dollars by quitting and redoing the exam.

Losing weight is another great way that you can secure better rates from the company.

One of the most important factors that the insurance company is going to look at when calculating your insurance premiums is your overall health, and your weight is a major factor in that.

If you want to trim down your premiums, hitting the gym and sticking to a healthy diet.

Both of these are going to help you shed those extra pounds, lower your cholesterol, lower your blood pressure, and reduce your risk of being diagnosed with any health complications such as someone needing no exam life insurance.

We can help you find rates from the most reliable life insurance companies available.

Insurance Loans vs. Withdrawals

If you decide that you need the cash that has built up inside of your whole life insurance plan, it can be confusing deciding which route to take.

Both of them have different advantages and disadvantages based on your situation.

Each policyholder is different and has different needs for their money.

We know that navigating the different aspects of life insurance can be confusing, but it doesn’t have to be.

We are here to help you make the best decisions for your insurance coverage.

Our agents have years of experience working with various kinds of applicants and different policy types.


Susan Wright, CLU, ChFC, RHU, REBC, ADPA, CITRMS, CIPA has been in the insurance and financial field for over 27 years. Even with years of experience, she continues to create new resources for others. Everything from books to training material.

Susan received her MBA from St. Louis University and her BA from Michigan State University.

She has worked in several areas but excels in writing material for both finances and insurance. Her goal is to give professionals credibility and assist in streamlining the sales process.

She has written countless articles for a variety of websites.

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