Can I take from my life insurance without penalties and taxes?

By Karin Price Mueller | for

Q. I have a universal life policy for $100,000. I pay $387 a month and I have 16 more years. I am 61 yrs old. Can I close it out and take the cash value and put it towards a pre-paid funeral plan without getting screwed by penalties or taxes?

— Looking at options

A. Universal life insurance is a type of whole life insurance.

Whole life insurance has two parts: a death benefit plus a cash value account.

When you pay your monthly insurance premium, part of it goes to cover the cost of the insurance and part goes into the cash value account, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Periodically, Kiely said, the insurance company credits your cash value account with interest.

“As we age the likelihood of death becomes higher and higher. Eventually the cost of the underlying insurance becomes greater than the premium you are paying,” he said. “The difference between the premium payment and the underlying cost of insurance comes out of the cash value account.”

The level insurance premium over the life of the policy is one of the benefits of whole life insurance, he said.

Kiely said the insurance agent who sold you the insurance policy was paid a large commission by the insurance company when the policy was first sold.

“The agent does not have to pay back the commission if the policy holder cancels the policy before the insurance company earns back the commission from policy charges,” he said. “To protect itself the insurance company usually charges the policyholder a fee for an early surrender of the policy.”

To determine the size of the early surrender fee, you should consult your insurance agent or the written insurance policy, he said.

When you surrender a cash value insurance policy and collect the cash value, you may have to pay taxes on part of the cash value, Kiely said.

“The formula to determine how much is taxable is; the cash received minus all the premiums you paid,” he said. “If the policy is relatively new the cash you received — after paying surrender charges — is probably less than the premiums you paid, resulting in a non-deductible loss.”

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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for’s weekly e-newsletter.

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Kiely Capital Management offers financial planning and investment advice. Serving Central and Northern New Jersey, Yvonne and Bernard (Bernie) Kiely provide over 25 years of experience offering discretionary asset management, retirement planning and income tax preparation. KCM is registered with the State of New Jersey as a Registered Investment Advisor.


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