Partial withdrawal (partial surrender)

A partial withdrawal and a policy loan are the two routes to money in an indexed universal life (IUL) policy while it stays in force. Insurers also call a withdrawal a partial surrender, and UK tax law calls it a part surrender. The money leaves the policy for good, so future index credits apply only to the smaller balance.

How it works

• Cash value. The cash value falls by the amount withdrawn, plus any surrender charge.
• Death benefit. Depending on the contract, the death benefit falls by the amount withdrawn, falls in proportion, or stays the same. Some insurers allow a withdrawal without reducing the death benefit.
• Surrender charge. An early, or premature, withdrawal during the surrender charge period, typically the first 10 to 15 years, carries the charge on the amount withdrawn. After the period ends the insurer makes no direct charge, so the withdrawal is penalty-free.
• Timing and limits. Some contracts allow withdrawals only from a set policy year. The cash surrender value left behind must still cover the monthly charges.
• Permanence. A withdrawal is permanent. Restoring the cash value takes new premium, which the policy design may not permit.

Worked example

Illustrative figures, not a forecast, on the typical 15-year surrender charge schedule.

• US$100,000 withdrawn in year 5: a one-time charge of 7%, or US$7,000.
• The same US$100,000 taken as a fixed policy loan at a net 1.25% a year: US$1,250 a year, with the cash value left in place.
• On a policy earning 7% a year, US$100,000 withdrawn means about US$7,000 a year less credited from then on, before compounding.

In an international IUL

Tax on a partial withdrawal depends on where the policyholder lives and, for a trust, where the settlor and beneficiaries live. In many jurisdictions withdrawals up to the cost basis, broadly the premiums paid, are not taxed, while amounts above it may be, so a common retirement sequence takes the cost basis first, then policy loans. For UK tax, an international IUL is treated in the same way as an offshore bond, so a withdrawal is a part surrender under the chargeable event rules. Up to 5% of each premium can be withdrawn in each policy year, cumulatively for 20 years, with no immediate tax charge. A policy loan from the insurer can also count as a part surrender under the same rules (section 501). Any excess over the cumulative allowance is a chargeable event gain, treated as arising at the end of that policy year. Where an offshore trust or company owns the policy, the withdrawal is paid to the trust or company as policyholder.

Common questions

Is a partial withdrawal the same as a partial surrender?

Yes. Both names describe taking part of the cash value out of the policy permanently. UK tax law uses the term part surrender.

Are there penalty-free withdrawals from an IUL?

Once the surrender charge period ends, a withdrawal carries no surrender charge. During the period, a policy loan is typically the penalty-free route to the cash value, because surrender charges apply to withdrawals and not to loans.

Is a policy loan or a partial withdrawal better?

A loan suits liquidity where the policy is meant to stay at full size: the cash value keeps earning on the full balance, and the loan can be repaid. A withdrawal suits a deliberate, permanent reduction of the policy, for example when the full death benefit is no longer needed.

Go deeper: loan or withdrawal compared and IUL policy loans.