What are the tax implications of withdrawing funds from a VUL policy?

Withdrawing funds from a Variable Universal Life (VUL) policy can have specific tax implications that are important to understand. The correct option indicates that withdrawals are generally tax-free up to the cost basis.

In the context of a VUL policy, the cost basis refers to the total amount of premiums that have been paid into the policy. When policyholders withdraw funds, they can take out an amount equal to or less than their cost basis without incurring any tax liability. This is because the initial premiums paid are considered the policyholder's investment in the contract, and thus are not subject to taxation upon withdrawal.

Once withdrawals exceed the cost basis, any additional amounts may be subject to income tax. This is generally considered income for tax purposes since it represents the earnings accrued on the premiums invested. Therefore, understanding the relationship between the cost basis and the withdrawal amounts helps in planning how to manage a VUL policy effectively, particularly in retirement or financial planning scenarios.

The other choices do not accurately reflect the tax treatment of withdrawals from a VUL policy, focusing instead on misconceptions about capital gains tax, cash value limits, and the immediate nature of income tax implications for any withdrawal. Hence, the option that specifies tax-free withdrawals up to the cost basis captures