Yes, you can take money out of your life insurance policy, but the method and tax consequences depend on the type of policy you own
Most life insurance policies fall into two categories: term life and permanent life (which includes whole life, universal life, and variable universal life). Term policies have no cash value and cannot be accessed before death. Permanent policies build a cash value over time, and that cash value is what you can withdraw or borrow against. The amount available, how much it costs you, and the tax treatment all vary by policy type and how long you have held it.
If you own a permanent policy, you have three main ways to access the money: withdraw cash value directly, take a policy loan, or surrender the entire policy. Each method has different tax and financial consequences, and choosing the wrong one can cost you thousands in taxes or lost death benefit.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) build cash value that you can access; term policies have no cash value.
- You can withdraw cash value directly, borrow against it as a policy loan, or surrender the policy entirely, and each method has different tax results.
- Withdrawals up to the amount you paid in premiums are typically tax-free; amounts above that are taxed as ordinary income.
- Policy loans do not trigger when ready taxes, but unpaid loans reduce the death benefit and may cause the policy to lapse if the loan balance grows too large.
- Surrendering a policy for its full cash value may result in a large tax bill if the cash value exceeds what you paid in premiums.
How cash value builds and what you can actually access
When you pay premiums on a permanent life insurance policy, part of that payment goes toward the death benefit and part goes into a cash value account. The insurance company invests this cash value, and it grows over time, either at a may provide rate (in whole life policies) or at a rate that varies with market performance (in universal and variable universal life policies). You own this cash value, and the insurance company holds it in reserve.
The amount you can access is limited to the cash value that has accumulated. In the first few years of a policy, cash value is often very small because the insurance company deducts surrender charges and administrative fees. The cash value grows faster in later years. You can check your current cash value by contacting your insurance company directly or reviewing your policy statement, which should arrive annually.
The cash value is separate from the death benefit. If you have a $500,000 whole life policy with $50,000 in cash value, the death benefit remains $500,000 when you die — but you can access only the $50,000 while living.
Withdrawing cash value directly from your policy
A direct withdrawal means you ask the insurance company to send you some or all of the cash value as a lump sum. The money arrives in your bank account, and you can use it for any purpose. The process typically takes one to two weeks.
The tax treatment depends on how much you withdraw. The IRS treats withdrawals using a "first-in, first-out" method: money you withdraw is considered to come from your premiums first, then from gains. If you have paid $100,000 in premiums and your cash value is $150,000, your first $100,000 in withdrawals are tax-free. Any withdrawal above $100,000 is taxed as ordinary income at your marginal tax rate.
A direct withdrawal reduces the death benefit dollar-for-dollar. If you withdraw $20,000 from a $500,000 policy, the death benefit drops to $480,000. The policy remains active as long as there is cash value left to pay the monthly cost of insurance. If you withdraw so much that the remaining cash value cannot cover the monthly cost, the policy lapses and terminates.
Taking a policy loan instead of a withdrawal
A policy loan lets you borrow against your cash value without withdrawing it. The insurance company lends you money and uses your cash value as collateral. You receive the loan proceeds, and the cash value stays in the policy to continue growing. You must repay the loan with interest.
Policy loans have a major tax advantage: the loan itself is not taxable income, and you do not owe taxes when you receive the money. This is true even if the loan amount exceeds the premiums you paid. However, if the loan is not repaid and the policy lapses, the unpaid loan balance becomes taxable income in the year the policy terminates.
The interest rate on a policy loan varies by policy and insurance company. Whole life policies often charge 5% to 8% annually; universal life policies may charge a higher rate or a rate that floats with market conditions. You set your own repayment schedule — there is no fixed term — but if you do not repay, the loan balance grows and reduces the death benefit. If the loan balance plus accumulated interest ever exceeds the cash value, the policy may lapse, and you will owe taxes on the unpaid portion.
Policy loans are useful when you need money temporarily and expect to repay it, or when you want to access cash value without triggering a large tax bill when ready. They are risky if you do not repay, because the policy can terminate unexpectedly and create a surprise tax liability.
Surrendering your policy for its full cash value
Surrendering means you terminate the policy and receive all remaining cash value in one payment. The death benefit ends when ready. This is a permanent decision — you cannot reactivate the policy later.
The tax consequence is the same as a direct withdrawal, but applied to the entire cash value at once. If your cash value is $150,000 and you paid $100,000 in premiums, you owe income tax on $50,000 of gains. The tax is due in the year you surrender, and the bill can be substantial if the cash value has grown significantly.
Surrendering makes sense only if you no longer need the death benefit and want to recover as much cash as possible. It is not reversible, so consider whether you might need life insurance protection in the future before you choose this route.
Comparing the three methods side by side
| Method | when ready Tax | Effect on Death Benefit | Repayment Required | Best For |
|---|---|---|---|---|
| Direct Withdrawal | Taxed on gains only (amount above premiums paid) | Reduced dollar-for-dollar | No | Permanent access to cash; willing to reduce death benefit |
| Policy Loan | None (unless policy lapses) | Reduced only if loan not repaid | Yes, with interest | Temporary cash need; plan to repay; want to preserve death benefit |
| Surrender Policy | Taxed on gains only (amount above premiums paid) | Eliminated | No | No longer need death benefit; want maximum cash recovery |
What happens if you do not repay a policy loan
If you take a policy loan and never repay it, the loan balance sits in your policy and grows with interest. The insurance company deducts the loan balance from the death benefit when you die. If the loan balance exceeds the cash value, the policy lapses — it terminates and you lose all coverage.
When a policy lapses due to an unpaid loan, the IRS treats the unpaid loan balance as taxable income to you in that year. If you borrowed $30,000 and the policy lapses with a $35,000 loan balance (including interest), you owe income tax on $35,000 as ordinary income. This can create a large unexpected tax bill, especially if you are in a high tax bracket.
To avoid this outcome, monitor your policy loan balance and make at least interest payments if you cannot repay the principal. Contact your insurance company if you are unsure whether your policy is at risk of lapsing.
Frequently Asked Questions
Can I withdraw money from a term life insurance policy?
No. Term life policies have no cash value and cannot be accessed before death. Only permanent policies (whole life, universal life, variable universal life) build cash value. If you need money and own only term insurance, you would need to convert the policy to permanent insurance first, which is not always possible and may require underwriting.
Will withdrawing from my policy affect my death benefit?
Yes, direct withdrawals reduce the death benefit dollar-for-dollar. A policy loan also reduces the death benefit if the loan is not repaid. Only if you repay a policy loan in full will the death benefit return to its original amount. Surrendering the policy eliminates the death benefit entirely.
How much tax will I owe on a withdrawal?
You owe tax only on the amount withdrawn that exceeds your total premiums paid. If you paid $80,000 in premiums and withdraw $100,000, you owe income tax on $20,000 at your ordinary income tax rate. The exact rate depends on your tax bracket. Consult a tax professional for your specific situation.
What is the difference between a policy loan and a withdrawal?
A withdrawal removes money from your policy permanently and reduces the death benefit when ready. A policy loan borrows against the cash value, does not trigger when ready taxes, and lets you repay on your own schedule. If you repay the loan, the death benefit is unaffected. If you do not repay, the loan balance reduces the death benefit and may cause the policy to lapse.
Can I access my cash value if my policy has a surrender charge?
Yes, but the surrender charge reduces the amount you receive. A surrender charge is a fee the insurance company deducts if you withdraw or surrender during the first several years of the policy. The charge decreases over time and eventually disappears. Check your policy document or contact your insurance company to find out when your surrender charge period ends.