Yes, you can cash out a life insurance policy, but the amount you receive and the tax consequences depend on the type of policy you own and how long you've held it.

Most term life insurance policies have no cash value — they exist only to pay a death benefit if you die during the coverage period. Permanent policies like whole life and universal life do build cash value over time, and that's the money you can access. The three main ways to get cash are surrender (close the policy and take what's left), take a loan against the cash value, or sell the policy to a third party. Each option has different tax and financial consequences, and some may affect your heirs' inheritance.

The amount you receive is almost never the full death benefit. When you surrender a policy, you get only the cash surrender value — what remains after the insurance company deducts surrender charges and any outstanding loans. If you've paid premiums for only a few years, this amount can be quite small. If you take a loan, you keep the policy in force and your beneficiaries still receive the full death benefit when you die, but you'll owe interest on the borrowed amount.

Key Takeaways

  • Term life insurance policies have no cash value and cannot be cashed out; only permanent policies like whole life and universal life build cash you can access.
  • Surrendering a policy closes it permanently and gives you the cash surrender value after fees, which is typically less than what you've paid in premiums during the first five to ten years.
  • Taking a loan against your policy's cash value keeps the policy active and your death benefit intact, but you pay interest and the loan balance reduces what your beneficiaries receive.
  • Selling your policy to a buyer (a life settlement) may give you more cash than surrender, but you lose the death benefit and the transaction has tax consequences.
  • Any amount you receive above what you've paid in premiums is usually taxable as ordinary income, and surrendering a policy can trigger a tax bill even if you receive less than you paid.

Understanding cash value in permanent life insurance

Cash value is the savings component built into whole life, universal life, and variable universal life policies. A portion of each premium you pay goes into this account, which grows over time either at a may provide rate (whole life) or based on market performance (variable universal life). The insurance company also deducts mortality charges and administrative fees from this account each month.

In the early years of a permanent policy, cash value grows slowly because surrender charges are high — sometimes 10 percent or more of the cash value. These charges exist to discourage early cancellation. After 10 to 15 years, surrender charges typically drop to zero, and the cash value becomes more accessible. You can check your current cash value by reviewing your policy statement or calling your insurance company directly.

Term life insurance does not build cash value at all. You pay a premium for a set period (10, 20, or 30 years), and if you don't die during that time, the policy straightforward ends. There is nothing to cash out. If you own a term policy and want access to cash, your only option is to stop paying premiums and let the policy lapse — but you receive nothing in return.

Surrendering your policy for a lump sum

Surrendering means you contact your insurance company, request to close the policy, and receive a check for the cash surrender value. This is the simplest method and takes two to four weeks. The cash surrender value is calculated by subtracting any outstanding loans, surrender charges, and unpaid premiums from your current cash value.

The amount you receive is often disappointing in the first decade. If you've paid $20,000 in premiums over five years but the cash value is only $8,000, you lose $12,000. This happens because early surrender charges are steep. After 15 years, the cash value may have grown to $18,000 or more, making surrender more worthwhile. You can ask your insurance company for an in-force illustration showing what the cash value will be at different future dates.

Once you surrender, the policy is gone and your beneficiaries receive nothing when you die. If you still need life insurance, you'll have to explore for a new policy, and your premiums will be higher because you're older. This is why surrender makes sense mainly if you no longer need the death benefit or if you've held the policy long enough that cash value has grown substantially.

Borrowing against your cash value

A policy loan lets you borrow money from your insurance company using your cash value as collateral. You keep the policy active, your death benefit remains in force, and your beneficiaries still receive the full amount when you die — minus whatever loan balance is outstanding at that time. Policy loans typically charge interest (usually 4 to 8 percent, depending on the policy), and you can repay on your own schedule or let the loan accrue.

The main advantage is that you don't lose the death benefit. If you borrow $50,000 against a $500,000 policy and die before repaying, your beneficiaries receive $450,000. The loan is not taxable income because it's technically a loan, not a withdrawal. However, if the loan balance grows and eventually exceeds your cash value, the policy can lapse and you may face a large tax bill on the difference.

Policy loans work well if you need temporary cash and expect to repay it, or if you want to access your money without closing the policy. They work poorly if you borrow heavily and never repay — the interest compounds, the loan grows, and eventually the policy may collapse. Before taking a loan, ask your insurance company for a projection showing how the loan will affect your policy over time.

Selling your policy in a life settlement

A life settlement is a sale of your policy to a third-party buyer — usually an investment company or a specialized broker. The buyer becomes the new owner, pays you a lump sum (typically more than the cash surrender value but less than the death benefit), and collects the death benefit when you die. Life settlements are most common for older policyholders with large death benefits and significant health issues.

The cash you receive from a life settlement is usually higher than surrender because the buyer is betting on collecting the death benefit. If your policy has a $500,000 death benefit and a $50,000 cash surrender value, a buyer might offer $80,000 to $150,000 depending on your age and health. However, you lose all ownership rights and your beneficiaries receive nothing.

Life settlements have tax consequences. The amount you receive above what you've paid in premiums is taxable as ordinary income. There are also broker fees (typically 10 to 15 percent of the sale price) and underwriting costs. You'll need to work with a life settlement broker to find a buyer, and the process takes two to four months. This option makes sense only if you need cash urgently, no longer need the death benefit, and have exhausted other borrowing options.

Tax consequences of cashing out

The tax treatment depends on how much you receive and what you've paid in premiums. If you surrender a policy and receive less than your total premiums paid, there's no income tax — you're straightforward getting back part of your own money. If you receive more than you've paid, the excess is taxable as ordinary income at your regular tax rate.

For example, if you've paid $30,000 in premiums and surrender for $35,000, you owe income tax on $5,000. If you've paid $30,000 and surrender for $25,000, there's no tax. Policy loans are not taxable because they're loans, not income. However, if a policy lapses while you have an outstanding loan, the IRS treats the loan balance as taxable income in the year the policy ends.

Life settlements have their own rules. The IRS taxes the gain (the amount received minus premiums paid) as ordinary income. Some states also tax life settlements. You should consult a tax professional before executing a life settlement because the tax bill can be substantial.

When cashing out makes sense

Surrender or borrow from your policy if you no longer need the death benefit, have held the policy long enough that surrender charges are minimal, and need cash for a major expense. This typically means 15 or more years of ownership. If you've held the policy only five years and surrender charges are still high, the math usually doesn't work unless you're in financial hardship.

A policy loan makes sense if you need temporary cash, expect to repay it, and want to keep the death benefit active for your beneficiaries. Borrowing is also useful if you want to avoid the tax consequences of surrender — loans are not taxable income.

A life settlement makes sense if you're older, in declining health, no longer need the death benefit, and need a large sum of cash. It's rarely the right choice for younger, healthy policyholders because the offer will be low and the tax bill will be high relative to what you receive.

Frequently Asked Questions

What's the difference between cash value and death benefit?

Cash value is the savings account inside a permanent life insurance policy that you can access while alive. The death benefit is the amount your beneficiaries receive when you die. They are separate — accessing cash value does not reduce the death benefit unless you surrender the policy or let a policy loan grow unchecked.

Can I cash out a term life insurance policy?

No. Term policies have no cash value. When you stop paying premiums, the policy ends and you receive nothing. If you need cash, you must look outside the policy — you cannot borrow against or surrender a term policy.

Will I owe taxes if I surrender my policy?

Only if you receive more than you've paid in total premiums. If you've paid $25,000 and surrender for $28,000, you owe tax on $3,000. If you surrender for $20,000, there's no tax. Ask your insurance company for a cost basis statement showing how much you've paid so you can calculate the tax impact before you surrender.

What happens to my death benefit if I take a policy loan?

Your death benefit stays in force, but it's reduced by the loan balance. If you borrow $40,000 against a $300,000 policy and die before repaying, your beneficiaries receive $260,000. If the loan grows and eventually exceeds your cash value, the policy may lapse and you'll face a tax bill.

How long does it take to get cash after I surrender?

Most insurance companies process surrenders within two to four weeks. You'll need to sign a surrender form and return it to the company. Some companies offer expedited processing if you need the money urgently, though this may come with a small fee.