Cash Value Life Insurance

If you own a cash value life insurance policy—like a whole life or indexed universal life (IUL) plan—you’re sitting on more than just a death benefit.

You’re building a living benefit too. One that you can access while you’re still alive—whether it’s to cover an emergency, fund an opportunity, or supplement retirement income.

But when it comes time to tap into that cash value, you’ll face two main options: Policy Loans vs. Withdrawals .

Understanding the differences between them can help you maximize benefits and avoid unexpected tax issues.

Let’s break it down.

💰 What Is Cash Value Life Insurance?

Cash value life insurance is a permanent policy that grows money inside it over time. This “cash value” is tax-deferred, and you can access it in your lifetime.

Think of it like a personal reserve that’s tied to your insurance plan.

But how you access that cash makes a big difference in how your policy performs, how your taxes play out, and what’s left behind for your family.

🔄 Policy Loans vs. Withdrawals: The Key Difference

🏦 Option 1: Policy Loans

A policy loan lets you borrow against your cash value without actually withdrawing it. Think of it like borrowing from yourself—no credit check, no approval needed.

✅ Pros:

• Tax-free access (as long as policy remains in force)
• No set repayment schedule
• Doesn’t reduce your policy’s cash value on paper (value continues to grow)

⚠️ Cons:

• Interest accumulates (compounding over time)
• Can cause policy lapse if loan grows too large and isn’t managed
• Reduces your death benefit if unpaid

Best for: When you want flexibility and don’t plan to repay right away—or ever.

💸 Option 2: Withdrawals

A withdrawal (also called a partial surrender) means you’re permanently taking cash out of your policy. You don’t owe it back, but it’s gone for good.

✅ Pros:

• Simple and permanent
• No interest
• No repayment required

⚠️ Cons:

• May be taxable if you withdraw more than you’ve paid in premiums (cost basis)
• Reduces your cash value and death benefit
• Could impact policy guarantees or performance

Best for: When you need a smaller amount and want a clean break from the funds.

🧠 Real-Life Scenario

Jasmine, age 45, has $60,000 in cash value in her IUL. She needs $20,000 to help with college costs for her son.

She compares:

• A loan, which keeps her policy intact but accrues interest.
• A withdrawal, which would be tax-free (because she’s only withdrawing part of her premiums) and would permanently lower her death benefit.

After a consult, she chooses a partial withdrawal to avoid interest and keep things simple.

🛠️ Important Considerations Before Choosing

• Talk to a pro. The wrong move could create tax issues or policy lapse.
• Know your cost basis. If you take out more than you’ve paid in premiums, part of it may be taxable.
• Understand compounding loan interest. Over time, it can erode your policy.
• Have a plan. Whether you repay a loan or not, make sure your policy stays in force.

🤝 How The Policy Shop Can Help

Navigating the fine print of your policy loan or withdrawal options can be confusing. At The Policy Shop, we break it down in plain English—so you make smart moves with your money.

📞 Book a free strategy call today and get a personalized policy review.