Yes, you can cash out a life insurance policy, but the method and amount depend on the type of policy you own
Most people think of life insurance as something that pays out only after death. But if you own a permanent policy — whole life, universal life, or variable universal life — you have built up a cash value that you can access while alive. Term life insurance has no cash value, so cashing it out is not an option. The three main ways to turn a policy into money are surrendering it to the insurance company, borrowing against it, or selling it to a third party. Each method has different tax consequences and affects your death benefit differently.
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 to withdraw.
- Surrendering your policy to the insurance company ends coverage but lets you take the cash surrender value, which is less than the cash value because of surrender charges.
- Policy loans let you borrow against your cash value without cashing out the policy, and the loan does not count as taxable income unless the policy lapses.
- Selling your policy to a buyer (called a life settlement) can bring in more money than surrender, but you lose all death benefits and the buyer becomes the new owner.
- Withdrawals and loans above what you paid in premiums are usually taxable as ordinary income, and surrendering early can trigger surrender charges that reduce your payout.
Surrendering your policy for cash surrender value
When you surrender a permanent life insurance policy, you tell the insurance company you want to end the coverage and receive the cash value. The company calculates your cash surrender value, which is the cash value minus any surrender charges. Surrender charges are fees the insurer deducts if you cash out early; they typically decline over time and disappear after 10 to 15 years, depending on the policy. If you are in year 3 of a 15-year surrender period, you will receive significantly less than if you wait until year 16.
To surrender, contact your insurance company directly — you do not need a broker or agent. Ask for a surrender quote, which shows the exact amount you would receive and any surrender charges that explore. The company will send you a form to sign. Once processed, you receive a check, and your coverage ends when ready. If you have borrowed against the policy, the loan balance is deducted from your surrender value before you receive the check.
Surrendering is straightforward but permanent. You cannot change your mind after the policy is surrendered. If you think you might want coverage again later, explore borrowing or a partial withdrawal instead, because those options keep the policy in force.
Borrowing against your cash value with a policy loan
A policy loan lets you borrow money from your insurance company using your cash value as collateral. You keep the policy in force, keep your death benefit, and do not have to repay on a set schedule. The insurance company charges interest on the loan, usually 5 to 8 percent depending on the policy type and current rates. Interest accrues whether you pay it back or not.
To take a policy loan, contact your insurance company and request the loan amount. The process is faster than a bank loan — often approved within days — because the insurer already knows your health and financial details. You receive the money, and the loan balance grows with interest. If you die before repaying, the outstanding loan and interest are subtracted from your death benefit, so your beneficiaries receive less.
Policy loans are not taxable income as long as the policy stays in force. However, if the policy lapses — meaning you stop paying premiums and the cash value runs out — the IRS treats any unpaid loan balance as taxable income in the year the policy lapses. This can create a surprise tax bill. If you borrow heavily and stop paying premiums, you risk this outcome.
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 specialized firm. The buyer pays you a lump sum — typically more than the cash surrender value but less than the death benefit — and becomes the new owner. The buyer pays all future premiums and collects the death benefit when you die. You have no further obligations and no coverage.
Life settlements are most common for people over 65 with policies worth $100,000 or more, because the buyer's return depends on how long you live. Younger policyholders or those in poor health may not attract buyers or may receive lower offers. To explore a life settlement, you work with a life settlement broker who shops your policy to multiple buyers and negotiates on your behalf. The broker takes a commission, usually 10 percent of the sale price.
The tax treatment of a life settlement is complex. Generally, you owe income tax on the amount you receive above what you paid in premiums. A broker or tax professional can calculate your basis (total premiums paid) and the taxable gain. Unlike a policy loan, a life settlement is a one-time transaction with no ongoing relationship to the insurance company.
Partial withdrawals from your cash value
Some permanent policies allow you to withdraw part of your cash value without surrendering the entire policy. This keeps your coverage in place and your death benefit intact, though the death benefit may be reduced by the amount you withdraw. Partial withdrawals are treated differently than policy loans: they are not borrowed money, so there is no interest charge and no loan to repay.
Withdrawals are taxable to the extent they exceed your cost basis — the total premiums you have paid. If you paid $50,000 in premiums and your cash value is $80,000, the first $50,000 you withdraw is not taxed, but any amount above that is taxable as ordinary income. Check your policy document or call your insurance company to confirm whether partial withdrawals are allowed and what the limits are.
Withdrawals reduce the cash value available for future loans or surrender, and they reduce the death benefit dollar-for-dollar in most policies. If you withdraw $10,000, your death benefit drops by $10,000. Some policies allow you to restore the death benefit by paying additional premiums, but this is not automatic.
Tax consequences of cashing out
The tax outcome depends on which method you choose and how much you have paid in premiums. If you surrender or withdraw an amount greater than your total premiums paid, the excess is taxable as ordinary income in the year you receive it. If you take a policy loan, there is no when ready tax, but if the policy later lapses with an unpaid loan balance, that balance becomes taxable income.
Life settlements have their own tax rules. You report the sale on Form 8949 (Sales of Capital Assets) and calculate gain or loss based on your adjusted basis. The basis includes premiums paid plus any policy dividends you received, minus any prior withdrawals or loans. A life settlement broker should provide a 1099-S or similar document showing the sale proceeds, which you use to complete your tax return.
Because tax treatment varies by policy type, how long you have owned the policy, and your total premiums paid, it is worth consulting a tax professional or CPA before cashing out. The difference between a taxable and non-taxable transaction can be substantial.
Comparing the three methods side by side
| Method | Amount You Receive | Policy Status After | Tax Treatment | Speed |
|---|---|---|---|---|
| Surrender | Cash surrender value (cash value minus surrender charges) | Ends; no coverage | Taxable on amount above premiums paid | 1–2 weeks |
| Policy Loan | Up to 90% of cash value (varies by policy) | Stays in force; death benefit reduced by loan balance | Not taxable unless policy lapses with unpaid balance | 3–7 days |
| Life Settlement | More than surrender value, less than death benefit (varies by buyer and your age) | Ends; no coverage; buyer owns policy | Taxable on gain above premiums paid | 30–90 days |
| Partial Withdrawal | Amount you request (limited by policy terms) | Stays in force; death benefit reduced by withdrawal amount | Not taxable up to premiums paid; taxable above that | 1–2 weeks |
Frequently Asked Questions
Can I cash out a term life insurance policy?
No. Term life insurance has no cash value because it is pure death benefit coverage with no savings component. If you no longer want the policy, you can straightforward stop paying premiums and let it lapse, but you will not receive any money. If you need cash, you would need to explore other options outside the policy.
What happens to my death benefit if I take a policy loan?
Your death benefit stays the same, but the outstanding loan balance (plus accrued interest) is subtracted from it when you die. If your death benefit is $500,000 and you have an unpaid loan of $100,000, your beneficiaries receive $400,000. If you repay the loan before death, your beneficiaries receive the full $500,000.
Will I owe taxes on a policy loan?
Not when ready. Policy loans are not taxable income as long as your policy stays in force. However, if your policy lapses and you have an unpaid loan balance, the IRS treats that balance as taxable income in the year the policy ends. This can result in a significant tax bill if you borrowed a large amount.
How much can I borrow against my policy?
Most insurance companies let you borrow up to 90 percent of your cash value, though some policies allow less. The exact limit depends on your specific policy and the insurer's rules. Contact your insurance company to find out your maximum borrowing amount.
Is a life settlement better than surrendering my policy?
A life settlement typically pays more than surrender because a buyer is paying for the death benefit, not just the cash value. However, you lose all coverage, and the process takes longer (30 to 90 days versus 1 to 2 weeks for surrender). A life settlement makes sense if you no longer need the coverage and want to maximize the money you receive, but it is not available to everyone — buyers focus on older policyholders with larger policies.