I had a 350,000 whole life insurance policy thru MONY for 34 years. After the first 10 years, I started paying the premium (~$5,500 annual) out of dividend, and when the dividend was not enough to pay the premium, I started taking automatic loans against the policy to pay the balance. This reduced the cash value each year, but the death benefit remained unchanged. It seemed great until the loan with accrued interest became too great to to cover the premium. I was then hit with a ~$12,000 bill to cover loan interest and premium for that year and expected increasing amounts each year. It was not worth keeping. I cancelled the policy and got hit with a 1099-R with taxable income of ~$100,000. What I learned, too late, was that if you cancel a whole life insurance policy, any loan balance upon cancellation date greater than what you pay in toward the premium from inception is taxable as ordinary income. I had paid into the policy ~$110,000, taken loans of ~$210,000 which left a taxable liability of ~$100,000. It makes sense. You cannot get something for nothing. What I regret is not having cancelled the policy 10 years ago, since I really did not need it.
