Cashing Out Northwestern Mutual Life Insurance: A Step-By-Step Guide

Northwestern Mutual offers a range of life insurance options, including whole life insurance, universal life insurance, and variable universal life insurance. All of these permanent life insurance policies build cash value over time, which can be accessed for a variety of purposes, such as covering emergencies, funding a down payment on a mortgage, or paying for a wedding. This cash value can be accessed in three main ways: taking out a loan from the insurance company, a partial surrender, or a total surrender. Taking out a loan allows policyholders to borrow money from their life insurance company, using the policy's cash value as collateral. A partial surrender involves giving up a portion of the policy and receiving the cash surrender value, while a total surrender involves accessing all of the cash surrender value but forfeiting the entire policy and its death benefit. It is important to note that withdrawing cash value from a life insurance policy can have tax implications and reduce the death benefit. Therefore, it is recommended to consult with a financial professional or tax advisor before making any decisions.

Cancelling a policy

• Call Customer Support: Contact Northwestern Mutual's customer support by calling 1-800-388-8123. Ask to speak with a representative who can assist you in cancelling your policy.
• Provide Policy Information: Have your policy number and relevant customer information ready. You will need to provide these details to the representative to access your policy.
• Request Cancellation: Clearly state that you want to cancel your coverage and premium payments. Explain your reasons for cancellation and confirm the effective date of cancellation.
• Receive Confirmation: After processing your request, Northwestern Mutual will send you a confirmation letter or email. This confirmation serves as proof that your policy has been cancelled.

It is important to note that cancelling a policy may have financial implications, such as surrender charges or fees. Before proceeding with the cancellation, carefully review your policy documents or consult a financial advisor to understand the potential costs and impacts of terminating your coverage. Additionally, consider evaluating your insurance needs and exploring alternative options to ensure you have adequate protection in place.

Borrowing from a policy

Pros

• There are no restrictions on what you can spend the money on.
• You can pay the loan back on your own schedule, though you will be charged interest.
• Your loan will not be taxed as income and the loan will not impact your credit.

Cons

• If you do not repay the loan or die before repaying it, the death benefit decreases.
• You could eventually lose coverage and face a negative tax consequence if you do not manage the loan.
• You owe interest on the money you take out, which is additional money that’s coming out of your pocket.

Repaying a life insurance loan is easy and flexible. Unlike most traditional loans, a policy loan doesn’t have a fixed repayment schedule. If you want to make a large payment one month, you can. If you want to pay nothing one month, you can. But it’s worth noting that your loan will accumulate interest. That means that if you don’t make payments, the balance will increase over time.

To apply for a policy loan of more than $100,000, you'll need to complete a Policy Loan Agreement form. To obtain a copy of the form, ask your representative or call Northwestern Mutual at 1-800-388-8123, 7 am–6 pm CT, Monday to Friday.

Partial surrender

A partial surrender allows you to cash out a portion of your life insurance policy, reducing its death benefit. This means that you will permanently give up a part of your death benefit in exchange for a portion of your cash surrender value.

How to Do a Partial Surrender

To perform a partial surrender, you will need to contact your Northwestern Mutual financial advisor or representative. They will walk you through the process and help you understand the implications of your decision.

Pros of a Partial Surrender

You do not need to pay back the money that you take out.

Cons of a Partial Surrender

• You permanently reduce the total amount of your death benefit.
• If you take out more than the basis you’ve paid in, you’ll have to pay income tax on distributions beyond your cost basis amount.

Tax implications

The cash value of a permanent life insurance policy grows tax-deferred, but there are some exceptions when you need to pay tax on it. You may have to pay income tax on a portion of the cash value if:

• The policy is surrendered; or
• The policy terminates before you’ve repaid a loan you took against the policy; or
• You withdraw the cash value and take more than the amount of premium you’ve paid into the policy; or
• The cash value is withdrawn, assigned or borrowed against for a policy classified as a Modified Endowment Contract (MEC).

If you take out a loan from your life insurance policy, you’ll ultimately need to pay it back with interest. If you do not repay the loan or die before repaying it, the death benefit will be reduced by the loan amount plus any interest that has accumulated. This may also result in a negative tax consequence.

If you choose to partially surrender your life insurance policy, you won't need to pay back the money that you take out, but you will permanently reduce your total amount of death benefit. If you take out more than the basis you’ve paid in, you’ll have to pay income tax on distributions beyond your cost basis amount.

A total surrender of your life insurance policy allows you to access all of your cash surrender value, but requires you to forfeit your entire policy, meaning you will give up the entire death benefit. This can also have tax implications, and some companies may require you to pay an additional surrender charge. Depending on your policy, this can be as high as 10 to 35 percent—but it usually goes down over time. Like with a partial surrender, you’ll have to pay income taxes on any funds beyond the amount you paid into your policy. And because you’re likely taking more out with a total surrender than with a partial surrender, the odds are higher that you’ll have to pay more in taxes than you would with a partial surrender.

In most cases, a death benefit received by a beneficiary is not considered taxable income—the death benefit is generally received free of income tax (both at the federal and state levels). However, there are a few exceptions that could affect a small number of people. For example, if the death benefit earned interest, the beneficiary may owe taxes on the interest accumulated from the date of death until the claim is settled (but not on the death benefit itself).

Riders

• Accelerated Death Benefit Rider: This rider allows the policyholder to receive a portion of the death benefit while still alive if they are diagnosed with a terminal illness or require long-term care. It provides financial assistance during the policyholder's lifetime and can help cover medical expenses or other costs associated with their condition.
• Waiver of Premium Rider: Should the policyholder become totally disabled, this rider waives the need to pay future premiums. This ensures that their life insurance coverage remains in force, even if they are unable to work and generate income. The rider typically defines the criteria for qualifying as totally disabled and may include a waiting period before the benefit takes effect.
• Guaranteed Insurability Rider: The guaranteed insurability rider guarantees the policyholder's ability to purchase additional life insurance coverage at specific intervals in the future, without the need for further medical exams or health questions. It is a valuable option if the policyholder foresees future events, such as expanding their family or taking on more financial obligations, that would necessitate increased life insurance protection.
• Long-Term Care Rider: With long-term care costs on the rise, this rider provides benefits to help cover expenses related to long-term care services, including home health care, nursing home care, or adult daycare. The rider usually outlines the conditions under which benefits can be accessed, such as requiring assistance with activities of daily living (ADLs).
• Child Rider: Providing coverage for the policyholder's children, a child rider offers financial protection in the event of a child's death. It serves as a more cost-effective method to insure children compared to individual life insurance policies. The coverage amount can assist with funeral expenses, medical bills, or other financial needs arising from the loss of a child.
• Spousal Rider: The spousal rider is designed to extend life insurance coverage to the policyholder's spouse under the same policy. It offers a convenient way for couples to ensure they both have adequate coverage without the need for separate policies. The rider takes into account the specific health and age factors of the spouse when determining the cost and coverage amount.

These riders offer enhanced protection and customization to a Northwestern Mutual life insurance policy, allowing policyholders to better address their unique needs and provide financial security for their loved ones.

Frequently asked questions