Variable Life Licensing Practice Exam 2025 - Free Variable Life Practice Questions and Study Guide

In a Variable Life Insurance policy, early withdrawals from the cash value can indeed lead to penalties, including surrender charges and tax consequences. When a policyholder withdraws funds before the policy is sufficiently established, the insurer might impose a surrender charge, which is a fee deducted from the cash value. This discourages early withdrawals and ensures that the insurance company can maintain its financial stability and investment portfolio.

Additionally, the cash value that has been accumulated may also be subject to taxation. If the withdrawal amount exceeds the premiums paid into the policy, any gains could be taxable as income, often considered ordinary income by the IRS. This situation can result in a significant financial impact if the policyholder is not aware of these tax liabilities.

These elements are crucial for anyone considering an early withdrawal from their Variable Life Insurance policy, as they can significantly diminish the value of the cash available. Hence, understanding this combination of surrender charges and tax implications is essential for policyholders when making decisions regarding their cash value.