Withdrawals

• Withdrawals are only possible on policies which pay dividends. A dividend-paying whole life insurance policy uses the dividends to buy paid up life insurance which is added to the base policy death benefit. This additional death benefit may be surrendered for its cash value. This money is tax free as long as you do not receive cash value in excess of the total premiums you've paid into the policy.
  
  

Policy Loans

• Policy loans are free of income tax as long as you keep them in force. Your policy offers you a policy loan with a low net cost to you. Insurance companies issue you a loan, charge interest on the loan, then secure an amount equal to the loan from the policy's cash value. But the amount in the cash value may continue to earn interest. This earned interest offsets the interest rate charged on the policy loan. These loans do not need to be reported as income.
  
  

Effects

• All money you withdraw in excess of your premium payments is taxed at ordinary income tax rates. This is because money in excess of your premiums is considered a gain in the policy. This amount must be reported on your tax return. If you ever terminate your policy, all policy loans are considered income and any gains from the policy are subject to income tax.
  
  

Consideration

• if you are going to use your life insurance policy as a way to generate supplemental retirement income, make sure that you get some guidance from your insurance company. You should not borrow so much from your policy that you put the policy in danger of lapsing. When making withdrawals, realize that withdrawals permanently reduce both the cash value and death benefit of the policy. You cannot replace this money.