Yes, you can cash in a life insurance policy, but the method depends on the type of policy you own and your situation
Most people think of life insurance as money paid to beneficiaries after death. But if you own a permanent life insurance policy — whole life, universal life, or variable universal life — you can access cash while you're alive. Term life insurance, which covers you for a set number of years, typically has no cash value to withdraw.
The three main ways to turn a policy into cash are surrender, policy loans, and selling the policy to a third party. Each has different tax consequences, affects your death benefit, and leaves you with different amounts of money. The right choice depends on whether you need the money now, whether you still want coverage, and how much of your premium you've already paid into the policy.
Key Takeaways
- Permanent life insurance policies build cash surrender value over time, but term policies do not.
- Surrendering a policy gives you the cash value minus any surrender charges, but ends your coverage permanently.
- Policy loans let you borrow against your cash value without surrendering the policy, but you pay interest and the loan reduces your death benefit.
- Selling your policy to a buyer (called a life settlement) may give you more money than surrender, but requires medical underwriting and takes weeks to months.
- Withdrawals and loans may trigger income tax if they exceed what you paid in premiums.
Surrendering your policy for cash value
When you surrender a policy, you tell the insurance company you want to end it and receive the cash surrender value. This is the amount the company has set aside from your premiums, minus fees. The company sends you a check, your coverage ends when ready, and you cannot get it back.
The cash surrender value is not the same as what you paid in. In the first few years, surrender charges (also called surrender fees) can be steep — sometimes 10 to 15 percent of the cash value or more. These charges decline over time. After 10 to 15 years, many policies have little or no surrender charge left. Your policy documents spell out the exact surrender schedule.
You can surrender a policy at any time by contacting your insurance company and requesting the surrender form. The company will tell you the current cash value, any surrender charges, and the net amount you'll receive. Processing usually takes one to two weeks. If you have a loan against the policy, the company deducts that from your payout.
Taking a loan against your policy
A policy loan lets you borrow money using your cash value as collateral, without surrendering the policy. You keep your coverage, and the insurance company keeps the cash value in place. You repay the loan with interest at a rate set by your policy (typically 5 to 8 percent, but this varies by company and policy type).
The loan amount cannot exceed your current cash value. If you borrow $50,000 against a $100,000 cash value, your death benefit is reduced by that $50,000 — so your beneficiaries would receive $50,000 less. If you die before repaying the loan, the unpaid balance plus interest is subtracted from the death benefit.
You don't have to repay a policy loan on a set schedule. You can pay it back whenever you want, or let it sit. However, unpaid interest compounds and grows. If the loan and interest eventually exceed your cash value, the policy can lapse and your coverage ends. Some policies have a grace period before lapse; others do not. Check your policy documents or call your insurer to understand the rules for your specific policy.
Selling your policy in a life settlement
A life settlement is the sale of your life insurance policy to a third-party buyer — usually an investment company or group of investors. The buyer pays you a lump sum (typically more than the cash surrender value), takes over the premium payments, and becomes the beneficiary. When you die, the buyer collects the death benefit.
Life settlements are only available for permanent policies, and usually only if you're over 65, have a serious health condition, or have a policy with a high death benefit. The buyer wants to know your health status, so you'll undergo medical underwriting — sometimes including a medical exam. This process takes four to eight weeks.
The payout from a life settlement is often higher than surrender value because the buyer is betting on how long you'll live and what the policy will eventually pay out. However, you lose all coverage, and the proceeds may be taxable. The tax treatment depends on how much you paid in premiums versus what you receive. A tax professional should review any settlement offer before you accept.
Tax consequences of cashing in your policy
The tax treatment of policy proceeds depends on how much you've paid in premiums (called your cost basis) and how much you receive. If you withdraw or borrow less than or equal to your total premiums paid, there is no income tax. If you receive more than you paid in, the excess is taxable income.
For example: if you paid $60,000 in premiums over 20 years and surrender the policy for $90,000, the $30,000 gain is taxable income. You'll receive a Form 1099-R from the insurance company, and you report this on your tax return.
Policy loans are not when ready taxable, but if the loan exceeds your cost basis, the excess is taxable. If the policy lapses or is surrendered while a loan is outstanding, any unpaid loan balance above your cost basis becomes taxable income in that year.
Life settlements have complex tax rules that depend on your age, health status, and the amount received. The IRS does not tax life settlements the same way as surrenders. You should consult a tax professional before entering a life settlement agreement.
Comparing your options side by side
| Method | Time to receive money | Keeps coverage? | Typical amount | Tax on gains? |
|---|---|---|---|---|
| Surrender | 1–2 weeks | No | Cash value minus surrender charges | Yes, if proceeds exceed premiums paid |
| Policy loan | 1–2 weeks | Yes | Up to your cash value | Only if loan exceeds cost basis |
| Life settlement | 4–8 weeks | No | Often higher than surrender value | Depends on age and health; consult tax professional |
What happens to your death benefit in each scenario
Surrendering your policy eliminates your death benefit entirely. Your beneficiaries receive nothing when you die, so this option only makes sense if you no longer need life insurance coverage or have other assets to leave behind.
A policy loan reduces your death benefit by the amount you borrow. If you borrow $50,000, your beneficiaries receive $50,000 less. The death benefit is restored as you repay the loan. If you die with an outstanding loan, the unpaid balance is deducted from what your beneficiaries receive.
A life settlement transfers the death benefit to the buyer. Your beneficiaries receive nothing; the buyer collects the full benefit when you die. This is permanent — you cannot change your mind and restore your beneficiaries' claim to the money.
Frequently Asked Questions
Can I cash in a term life insurance policy?
No. Term policies have no cash value because they are pure insurance with no savings component. They expire at the end of the term (10, 20, or 30 years) with nothing to show for your premiums. If you need cash, your only option is to stop paying and let the policy lapse.
What if I have a policy loan and I die before repaying it?
The unpaid loan balance plus accrued interest is subtracted from your death benefit. If you borrowed $40,000 and owe $45,000 in principal and interest when you die, your beneficiaries receive $45,000 less than the stated death benefit. The remaining amount still goes to them.
How do I know if my policy has cash value?
Check your policy documents or contact your insurance company. Your annual statement should show the current cash surrender value. If you own whole life, universal life, or variable universal life, you have cash value. If you own term life, you do not.
Can I take out a policy loan if I still owe money on the policy?
Yes. You can borrow against your cash value even if you're still making premium payments. The loan is separate from your premium obligation — you continue paying premiums as usual, and you repay the loan on your own schedule (or not at all, though interest will accrue).
Will cashing in my policy affect my taxes or benefits?
Cashing in may create taxable income if you receive more than you paid in premiums. It could also affect means-tested benefits like Medicaid or Supplemental Security Income if the proceeds push your assets above the limit. Consult a tax professional and your benefits administrator before cashing in a large policy.