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Generally, it is possible to withdraw limited amounts of cash from a life insurance policy. The amount available differs based on the type of policy you own and the company issuing it. The main advantage of cash-value withdrawals is that they are not taxable up to your policy basis, as long as your policy is not classified as a modified endowment contract (MEC).

However, cash-value withdrawals can have unexpected or unrealized consequences:

  1. Withdrawals that reduce your cash value could cause a reduction of your death benefit - a potential source of funds you might need for income replacement, business purposes or wealth preservation.

  2. Cash-value withdrawals are not always received income-tax free. For example, if you take a withdrawal during in the first 15 years of the policy and the withdrawal causes a reduction in the policy's death benefit, some or all of the withdrawn cash could be subject to taxation.

  3. Withdrawals are treated as taxable to the extent that they exceed your basis in the policy.

  4. Withdrawals that reduce your cash surrender value could cause your premiums to increase in order to maintain the same death benefit; otherwise, the policy could lapse.

  5. If your policy has been classified as an MEC, withdrawals generally are taxed according to the rules applicable to annuities - cash disbursements are considered to be made from interest first and are subject to income tax and possibly the 10% early-withdrawal penalty if you're under age 59.5 at the time of the withdrawal

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Q: Is there a penalty for withdrawing on life insurance?
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