Avoiding Taxes on Cash Value Policy Withdrawals

Term insurance policies do not have a cash value. Whole life policies build up a cash value over time. If you wish to tap some of the cash in your policy, you can do so but, to avoid paying taxes, you need to withdraw the money you paid in premiums first. Since you put that money into the policy you were already taxed on those earnings and will not have to pay any income tax on that amount.

Then, if you need more, consider taking the cash as a loan rather than as a withdrawal. Loan proceeds are not taxable since you will pay those funds back over time. Or, if you choose not to pay the loan back, your heirs will not owe taxes on those funds as long as the policy is still in force when you pass away.

If you do tap into the cash value of a life insurance policy, keep in mind any withdrawals will automatically reduce the death benefit of the policy, reducing the amount your beneficiary will receive upon your death. That is true for loans as well – any loans will be deducted from death benefits.