“Withdrawal value” refers to the amount of money that a policyholder can withdraw from the cash value component of a life insurance policy, such as a whole life or universal life insurance policy, without cancelling the policy. This feature is part of the savings or investment aspect of permanent life insurance policies, which accumulate cash value over time as part of the premiums paid by the policyholder are invested by the insurance company. Unlike the cash surrender value, it’s what you can take out while keeping the policy.
Key aspects of withdrawal value include:
Cash value accumulation
Over time, a portion of the premiums paid into a permanent life insurance policy contributes to its cash value, which grows based on interest, dividends, or other investment gains, depending on the type of policy.
Access to funds
The withdrawal value represents the accessible part of this cash value that the policyholder can withdraw for personal use, subject to the terms and conditions of the policy.
Impact on coverage
Withdrawing funds from the cash value of a life insurance policy reduces the overall cash value and, depending on the policy, may reduce the death benefit. Policyholders should consider the impact of withdrawals on their policy’s benefits and their beneficiaries.
Tax implications
In Canada, a withdrawal is a partial surrender, which is a disposition for tax purposes. The tax treatment depends on the policy’s adjusted cost basis (ACB): only a proportionate share of the ACB is set against each withdrawal, so part of a withdrawal can be taxable whenever the policy’s cash value is above its ACB, even if the amount withdrawn is less than the ACB.
Flexible financial tool
The ability to withdraw from the cash value offers policyholders flexibility to address financial needs or opportunities without having to liquidate other assets or take out a loan.
Policy terms
The specific terms regarding withdrawals, including any fees, minimum or maximum withdrawal amounts, and the impact on the insurance coverage, are detailed in the policy contract. Policyholders are advised to review these terms carefully and consult with their insurer or financial advisor before making a withdrawal.