What effect does withdrawing cash value from a whole life policy have?

Withdrawing cash value from a whole life policy directly impacts the policy's financial structure. When a policyholder takes a cash withdrawal, the cash value of the policy decreases because the amount that is withdrawn is subtracted from the total cash value accumulated within the policy. Additionally, the face value—the death benefit that the beneficiaries would receive upon the policyholder’s death—is also reduced by the amount withdrawn. This occurs because the insurance company recalculates the risk associated with the remaining cash value, effectively lowering the death benefit to reflect the reduced financial backing of the policy.

In this way, both elements—the cash value and the face value—are negatively impacted by a withdrawal, making the choice reflecting this dual reduction the correct one. Understanding the implications of such transactions is crucial for policyholders when making decisions about accessing the cash value of their whole life insurance.