Mark, New York

There are basically three ways that you can get the cash value out of a universal life insurance policy. You can take a loan against the value of the policy; you can simply withdraw money from the account; or, because you no longer feel that you need the death benefit protection, you could surrender the policy.

Each of these options has different tax ramifications, depending on the amount you've paid in premiums and the cash value in the policy.

• Withdrawing money from the policy. You can choose to withdraw money directly from the cash value of a life insurance policy, but if the amount you withdraw is higher than the amount you've paid in premiums, then you will have to pay taxes on the portion that exceeds your premium payments.

  Joann Steidinger, a product specialist for Northwestern Mutual Life Insurance Company, offers this example: You have $1,000 in cash value in a life insurance policy and have paid $500 in premiums. You can withdraw up to $500 without having to pay taxes, but every dollar withdrawn above that is taxable.

• Loans. Another way access the cash value of life insurance is by taking out a loan against the policy. In this case you pay no taxes immediately, regardless of the cash value or the amount you've paid in premiums. However, you still need to pay attention to these factors because if you surrender or let the policy lapse, you will have to pay taxes on any amount of cash value that exceeds your premiums paid, regardless of whether or not you've taken a loan against it.

  Say you have a whole life policy with $1,000 in cash value and you've paid $500 in premiums. According to Steidinger, if you took out a loan of $900 against the policy, you would, at that point, pay no taxes. If you let the policy lapse, or surrendered it, you would only get the remaining $100 of your cash value from the policy, but you would have to pay taxes on the full $500 that the cash value exceeded your payments in premiums. This process is sometimes referred to as "surrender squeeze."

  However, if you kept the policy in force until you died, and never paid back the $900, the loan balance would be subtracted directly from your death benefit, and neither you nor your beneficiary would have to pay taxes on the loan.

• Surrender the policy. If you no longer need the death benefit protection of your policy, you can simply choose to end the contract. You should be aware though that many life insurance contracts have expensive "surrender fees" if you want out of the policy before a certain amount of time has passed. These fees could eat into your cash value and, just like withdrawing money from the policy, you will have to pay taxes on any money you get from the insurance company that is more than the amount you have paid in premiums.

Note that, if your policy is a modified endowment contract, which is an insurance policy that is overfunded to build up more cash value, taxes for loans or withdrawals from the policy may be significant.

The Insure.com Life Insurance and Annuity Tax Tool provides more detailed examples of the tax implications of taking various actions with your life insurance policy.

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Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.