When You No Longer Need the Policy

If your kids are grown and your family has plenty of assets to fall back on if you pass away, you may no longer need to maintain a whole life insurance policy. But if you cash out the policy you might owe a significant amount of tax on the proceeds. What can you do? First determine the rate of return on the policy; if it's 3 to 4 percent, and you've had the policy for a while, the amount you earn each year may exceed the amount of your premium. If so, ask the insurance company to deduct the cost of your premium from your earnings. Your cash value won't grow as quickly, but you will avoid making additional payments. Then, if you want to withdraw some of the balance, keep the amount lower than the total value of the premiums you have paid so far – if you do, you won't owe taxes on that amount. Then, when you pass away, your heirs will inherit the remainder, tax-free.

If your rate of return is very small, it may make sense to cash out the policy and re-invest the funds, even if you do take a tax hit. Talk to a financial advisor to get advice specific to your situation and financial needs.