Can I Pull Out my Savings Without Getting Taxed?

Cash Value Life Insurance policies have a cash savings feature. There are three methods for the owner of a Cash Value Life Insurance policy to take out money from the policy. The three methods are to withdraw, surrender, or borrow the money from the policy.

If you simply withdraw money from the policy, there could be a taxable event depending on how much money you have put into the policy and the way the insurance company treats the money taken out. If the insurance company treats the money withdrawn as first in first out (FIFO) then you would not pay taxes on the amount you take out up to the amount you paid into the policy. If, on the other hand, the insurance company treats the money taken out of the policy as last in first out (LIFO) then you probably will be taxed on the money you take out. There are a few variables to consider depending on the policy you need to consider before deciding if a regular withdrawal is the best way to take money from the policy.

If you have a Cash Value Life Insurance policy, you can also surrender the policy. Surrendering the policy means you cancel it and no longer make payments and no longer have a Cash Value Life Insurance policy in force. Depending on how much the surrender value is and how much you paid into the policy you may or may not be required to pay income taxes on the surrender value. As an example, say the surrender value of the policy is $100,000 but after a calculation, it is determined that you paid a total of $50,000 into the policy then you would be taxed on $50,000. In another example, say the surrender value is $50,000 and after a calculation, it is determined that you paid $100,000 into the policy then you would most likely not have to pay an income tax on the surrender value.

The way to avoid taxes when taking money out of a Cash Value Life Insurance policy is to borrow it from the policy. When you borrow money, you pay an interest rate on the amount you borrow, however, you will not pay an income tax when using this method. Further, the money you borrow can be paid back from the death benefit proceeds when you pass away. Borrowing money from a Cash Value Life Insurance policy is the plan when buying a Cash Value Life Insurance policy for cash distributions during the life of the policy owner. It allows a distribution with no tax ramifications which is the idea behind purchasing one of these types of policies. This is the best benefit of a Cash Value Life Insurance policy.