Permanent life insurance policies also offer an additional benefit: access to the cash value of the policy.
Under certain conditions, policyholders can usually borrow a portion of their policy’s cash value under fairly favorable terms. And interest payments on policy loans go directly back into your policy’s cash value.
Generally, loans taken from a policy will be free of current income taxes provided certain conditions are met, such as the policy does not lapse or mature. Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit. Loans also may increase the possibility that the policy may lapse. If the policy lapses, matures, or is surrendered, the loan balance would be considered a distribution and would be taxable.
Withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may be subject to surrender charges and assessed a 10% federal income tax penalty. Life insurance is not FDIC insured. It is not insured by any federal government agency or bank or savings association.