The surrender value is the actual sum of money a policyholder will receive if they try to access the cash value of a policy. Other names include the surrender cash value or, in the case of annuities, annuity surrender value. Often there will be a penalty assessed for early withdrawal of cash from a policy.

What happens when you surrender a universal life policy?

If you surrender a cash value life insurance policy, any gain on the policy over and above your cost basis (premiums paid) will be subject to federal (and possibly state) income tax. In general, the amount the policy owner has paid for the policy, up to the cost basis, is tax free.

Is cashing out an insurance policy taxable?

If you have a cash-value policy, withdrawing more than your basis (the money it’s gained) is taxable as ordinary income. It’s best to check with your provider before you cash in — some policies state cash withdrawals made in the first 15 years are taxable.

When can you surrender a universal life policy?

Universal life policies typically include a surrender period during which cash values can be surrendered, but a surrender charge of up to 10% may be applied. When the surrender period ends, usually after seven to 10 years, there is no surrender charge.

What are the tax consequences of cashing out a universal life policy?

The basis of the policy is the total insurance premiums paid on the policy. If you cash out a universal life policy worth $30,000, and you have paid a total of $25,000 in premiums, you will pay taxes on the gain of $5,000. Partial Withdrawals.

Can you take money out of universal life insurance?

Some forms of universal life insurance also offer a cash value component. The cash value can build up investment gains (and sometimes get hit with losses, depending on the policy type). You can take money out of cash value via a withdrawal or loan.

When does a universal life insurance policy expire?

Universal life insurance typically guarantees a rate up to a certain age, such as 100 or 105. If you live past that age, you can still keep the policy in force but will have to pay a substantial rate increase. A universal life policy will expire if you stop paying the premiums and the cash value becomes depleted.

Can you exchange universal life insurance for an annuity?

Tax Free Exchanges. Under IRC Section 1035, you can exchange your universal life insurance policy for an annuity, free of income tax. This is tremendously useful for anyone who may no longer need or want a life insurance policy (for example, the children are grown) but who has a need or expects a need for income in the future.