Q:
Is it true that after 10 years the proceeds of a variable life policy and the cash value are tax-free if you want to withdraw the money?
Answer:
The cash value of variable life insurance (and other types of cash value insurance) may be accessible by various means, but some of them require you to sacrifice at least part of your insurance coverage. And typically, the insurance proceeds of a life insurance policy are not accessible at all.
Note: This information pertains specifically to variable life insurance; variable universal life is a different type of policy and may have different rules.
Cash value
One way to access the cash value of life insurance is through a policy loan. Like all cash value life insurance, variable life allows you to borrow against your cash value. Policy loans are usually not considered taxable income, but you normally have to pay a nominal interest rate. Part of the interest you pay may be credited back to your cash value (so you are in effect making interest payments to yourself). Policy loans can affect the growth of the cash value, and could reduce the death benefit if they are not repaid.
Certain types of cash value policies (such as universal life) also allow partial withdrawals of the cash value. Most variable life policies do not allow such withdrawals. A cash value withdrawal is accomplished by making a partial surrender of the policy. This means that your death benefit could be reduced, because a partial surrender could effectively cancel part of the policy. A withdrawal from the cash value of a life insurance policy is typically tax free up to your basis in the policy (the premiums you have paid in), but there may be surrender fees associated with the transaction.
Some cash value policies also allow you to access your full cash surrender value by surrendering (canceling) the policy. However, once you cancel the policy, you will no longer have insurance protection.
Proceeds (death benefit)
Typically, you do not have access to the insurance proceeds of any life insurance policy before your death. Some insurance policies do allow you to use part of the death benefit for medical expenses or long-term care while you are alive, but this is rare. Should you become terminally ill, you may also have the option of selling your life insurance policy to a viatical settlement funding company, and using the money to pay for your care. Outside of these extreme circumstances, however, you typically cannot access the insurance proceeds of a life insurance policy during your lifetime.