One benefit that sets VUL life insurance apart from term coverage is the ability to tap into the cash value through loans or withdrawals. However, these moves come with their own considerations:

Policy Loans

When you borrow against your cash value, you pay interest to the insurer. If you repay the loan, your death benefit and cash value eventually recover. Many policyholders like this feature because the funds aren’t typically taxed as income at the time of the loan, though taxes could come into play if the policy lapses with an outstanding balance that exceeds the premiums paid in.

Withdrawals

You can also withdraw part of the cash value outright, subject to potential surrender charges if you’re still within the penalty period. Withdrawals reduce the death benefit, sometimes dollar-for-dollar. Once you withdraw more than the cost basis, any excess might be taxed. Unlike loans, you don’t have to pay back withdrawals, but you lose the compounding potential and reduce the protection element for beneficiaries.

Avoiding Lapse or MEC Classification

Large withdrawals or multiple loans over time can destabilize the policy. If the remaining cash value no longer covers monthly charges, you could be on a path to lapse. Also, injecting a large sum of money or rearranging the policy’s funding drastically might trigger MEC status. To safely manage distributions, it’s prudent to get periodic in-depth policy reviews to confirm that you remain in good standing for both coverage and tax benefits.