What method is used for cash withdrawals from a life insurance policy?

The correct choice, FIFO (First In, First Out), is the method used for cash withdrawals from a life insurance policy. This approach means that the first premiums or contributions paid into the policy are considered to be the first amounts that are withdrawn when a policyholder takes cash out. This is important because withdrawals are often treated as a return of premium before any policy gains, meaning that the initial investments are effectively taken out before any earnings or interest that may have accumulated.

By using the FIFO method, it helps to ensure that the policyholder is effectively receiving their original investment back first, which can also have implications for tax considerations. Because the amount withdrawn is essentially tax-free up to the total amount of premiums paid, this method provides clarity on which funds are being accessed.

Other withdrawal methods like LIFO (Last In, First Out) would suggest that the most recent contributions are taken first, which could lead to taxable gains being realized sooner. The average cost method and last transaction are not applicable in this context as they pertain to other types of financial transactions and asset management. Understanding FIFO in the context of life insurance withdrawals is crucial for policyholders to effectively manage their investments and understand the implications of accessing their funds.