Can I Withdraw Money from My Universal Life Insurance Policy?

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

Yes. You can take money out of a universal life insurance policy in three ways: a partial withdrawal from the cash value, a policy loan, or a full surrender that ends the policy and pays out the cash surrender value. On a policy that is not a modified endowment contract (MEC), withdrawals up to the premiums you have paid are generally tax-free, and anything above that is taxed as ordinary income (IRC §72(e)). Every dollar you take out also shrinks the cash value that pays the policy’s insurance charges, so the real question is what the withdrawal does to the policy afterward.

Who this is written for

Many dual-income families in the Bay Area and Seattle own a universal life policy they bought years ago, often before RSUs made them wealthy on paper. Some hold group universal life (GUL) through an employer, with a small cash accumulation fund on top of the coverage. When a big expense arrives (a down payment, private school tuition, a gap between jobs), that cash value looks like easy money. Sometimes it is. Often, selling shares you already own costs less and leaves the family’s insurance intact.

Three ways to take cash out, and how each is taxed

“Investment in the contract” is the premiums you have paid, minus amounts you already received tax-free (IRC §72(e)(6)). IRS Publication 525 puts it this way for a full surrender: you include in income “any proceeds that are more than the cost of the life insurance policy,” and you should receive a Form 1099-R showing the taxable part (IRS Pub 525).

Three exceptions that change the answer

• The policy is a MEC. A policy that was funded faster than the 7-pay test allows during its first seven contract years (or the seven years after a material change to the contract) becomes a modified endowment contract (IRC §7702A). Withdrawals and loans from a MEC come out gain first, and the taxable part carries an extra 10% tax before age 59½ (IRC §72(e)(10) and §72(v)). Overfunded policies sold as “tax-free savings” are the ones most likely to be MECs.
• The policy is less than 15 years old and the withdrawal reduces the death benefit. Under IRC §7702(f)(7)(B), part of the cash you receive can be taxed as income first, up to a “recapture ceiling” the insurer calculates. The carrier’s service team can tell you before you sign whether any part of a proposed withdrawal would be taxable.
• A loan is still open when the policy lapses or you surrender it. The unpaid loan is treated as money you received. If the total exceeds your cost, you owe tax on the gain in a year when you got no cash, because the loan money was spent long ago.

Worked example: a $950,000 household in San Jose

Assumptions (illustrative, not a real family): Maya and Daniel, both 42, two children aged 4 and 8. Household wages including RSU vests about $950,000; taxable income about $840,000 before any policy transaction (assumed to be about the same for federal and California purposes, for simplicity). Daniel owns a universal life policy he bought at 26: $1,500,000 death benefit (level, “Option A”), $6,000 a year in premiums for 16 years. Cash value $140,000, no surrender charge left, not a MEC. They need $60,000 for a kitchen remodel.

1. Partial withdrawal of $60,000. His investment in the contract is 16 x $6,000 = $96,000. The $60,000 is below that, and the policy is past year 15, so the withdrawal is generally tax-free. On a level death benefit policy, most contracts cut the death benefit by the amount withdrawn, to about $1,440,000. The remaining $80,000 of cash value now has to carry rising insurance charges as Daniel ages, so he needs a fresh in-force illustration to see whether his $6,000 premium still keeps the policy alive to the age he cares about.
2. Full surrender for $140,000. Gain = $140,000 minus $96,000 = $44,000 of ordinary income. Their taxable income is above $768,700, so federally the gain sits in the 37% bracket for 2026: about $16,280. For California, using the 2025 schedule (the latest published), $840,000 plus $44,000 stays inside the 10.3% bracket ($742,958 to $891,542): about $4,532. Total tax about $20,812, and the family loses $1,500,000 of coverage while their kids are 4 and 8. A Washington family with the same numbers would owe the federal $16,280 and no state income tax in 2026 (WA DOR). Washington’s new 9.9% income tax on AGI over $1,000,000 starts in 2028, so a surrender in 2028 or later could be taxed by the state too.
3. Sell vested RSUs instead. Shares from a recent vest were already taxed as wages at vest, and their cost basis is the value at vest. Selling $60,000 of recently vested shares typically creates little extra tax, and it trims a concentrated position in their employer’s stock. For many families at this income, this is the cheapest source of cash, and the insurance stays whole.

Steps to withdraw money from a universal life policy

1. Confirm who owns the policy. If an irrevocable life insurance trust owns it, the trustee makes the request and the money belongs to the trust, not to you.
2. Request an in-force illustration and a cost basis statement from the insurer. Ask for the current cash value, the cash surrender value, the investment in the contract, any outstanding loan, and whether the policy is a MEC.
3. Ask how a withdrawal changes the death benefit and whether any of it would be taxable under the 15-year rule. Ask for a second illustration that shows the policy after the withdrawal.
4. Check contract limits. Many contracts set a minimum withdrawal, a minimum remaining cash value, a per-transaction fee, or surrender charges in the early years. Your contract and the carrier’s service team have the specifics.
5. Submit the withdrawal or loan form with the owner’s signature. California and Washington are community property states, and some carriers ask for the spouse’s signature when premiums were paid from marital income.
6. Keep the paperwork for your CPA. The insurer reports a surrender or taxable withdrawal on Form 1099-R for the tax year of the payout.

For employer group universal life, the plan administrator handles withdrawals from the cash accumulation fund. If you are leaving the employer, ask what happens to the cash value and coverage when you go, before your last day.

Mistakes we see with policy withdrawals

• Treating the cash value as a savings account and never re-checking whether the remaining value can carry the policy.
• Taking repeated loans with interest capitalizing until the policy lapses and a large 1099-R arrives.
• Surrendering coverage the family still needs, then paying far more for new term insurance at an older age, or failing underwriting.
• Assuming the beneficiary designation still matches the estate plan. A withdrawal is a good moment to confirm it names the right person or your trust.

What to document for your kids

Write down in a page why the policy exists, how much coverage the family needs and until when, who owns it, who the beneficiary is, and what you decided about the cash value and why. If one parent handles insurance and the other does not, this page is what the other parent, a trustee, or an older child will need someday. As Kevin puts it: “Conversations fade. Documentation compounds.”

Common questions

Can you cash out a universal life insurance policy completely?

Yes. A full surrender ends the coverage and pays the cash surrender value, which is the cash value minus any surrender charge and outstanding loan. Proceeds above what you paid in premiums (less prior tax-free amounts) are ordinary income. Before surrendering, price replacement coverage if anyone still depends on your income.

Does a cash value withdrawal always reduce the death benefit?

In most universal life contracts it does. With a level death benefit, the insurer typically lowers the face amount by the withdrawal. With an increasing death benefit, the payout falls because the cash value included in it falls. A withdrawal does not have to be repaid and does not charge interest; a loan does.

Next step

Call your insurer and ask for an in-force illustration and a cost basis statement before you request any money. If you want a second opinion on whether to keep, tap, or replace the policy alongside your RSUs and estate plan, start with our Tax & Wealth Assessment. Related reading: ways to take money out of life insurance, how to get out of a whole life policy, withdrawing dividends from life insurance, and how we handle RSU sales.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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