You can cash out most life insurance policies, but the method and amount depend on the type of policy you own
If you own a permanent life insurance policy — whole life, universal life, or variable universal life — you can withdraw or borrow against the cash value while you are still alive. Term life insurance has no cash value, so there is nothing to withdraw. The amount you can access, the taxes you will owe, and what happens to your death benefit all depend on which option you choose and how much you take out.
The three main ways to access cash are a withdrawal, a policy loan, or a surrender (cashing in the entire policy). Each has different tax consequences and affects your coverage differently. Understanding these options before you need the money helps you avoid surprises.
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.
- A withdrawal takes money directly from your cash value and is taxed only on the amount above what you paid in premiums, but it reduces your death benefit.
- A policy loan lets you borrow against your cash value at a set interest rate and does not trigger when ready taxes, but unpaid interest and loans reduce the death benefit your beneficiaries receive.
- Surrendering the entire policy gives you all remaining cash value but ends your coverage and may result in taxes on gains above your total premiums paid.
- If you owe money to creditors or are receiving means-tested benefits, cashing out a policy can have legal or financial consequences you should understand first.
Withdrawals: Taking money directly from cash value
A withdrawal lets you take money directly from your policy's cash value. The insurance company sends you a check for the amount you request, up to the full cash value. You do not have to repay it, and there is no interest involved.
The tax treatment depends on how much you withdraw. Money you take out up to the total amount of premiums you have paid into the policy is not taxed. Any amount above that is treated as taxable income in the year you withdraw it. For example, if you paid $50,000 in premiums over 20 years and your cash value is now $75,000, you can withdraw $50,000 tax-free and would owe income tax only on the remaining $25,000 if you withdrew it.
The downside is that every dollar you withdraw reduces your death benefit by that same amount. If you withdraw $10,000, your beneficiaries will receive $10,000 less when you pass away. Some policies also charge a surrender charge if you withdraw a large amount early, especially in the first 10 to 15 years of the policy.
Policy loans: Borrowing against your cash value
A policy loan lets you borrow money using your cash value as collateral. The insurance company lends you the money at an interest rate set in your policy contract, typically between 4 and 8 percent depending on the policy type and when it was issued. You do not have to repay the loan on any set schedule — you can repay it whenever you want, or not at all.
The main advantage is that policy loans are not taxed when you receive them. You borrow the money and owe no income tax in that year. However, any interest you do not pay gets added to the loan balance, and both the loan and unpaid interest reduce your death benefit. If you borrowed $20,000 and never repaid it, your beneficiaries would receive $20,000 less (plus whatever interest accumulated).
If you pass away while a loan is outstanding, the insurance company deducts the loan balance and all unpaid interest from your death benefit before paying your beneficiaries. If the loan and interest grow larger than your cash value, the policy can lapse and your coverage ends. This is a real risk if you borrow a large amount and do not repay it.
Surrendering the policy: Cashing in completely
A surrender means you give the policy back to the insurance company and receive all remaining cash value in a lump sum. Your coverage ends when ready. This is a permanent decision — you cannot restart the policy later.
The tax treatment is the same as a withdrawal: you owe income tax only on the amount by which your cash value exceeds your total premiums paid. If your cash value is $100,000 and you paid $70,000 in premiums, you owe income tax on $30,000. However, some policies charge a surrender charge if you cash out within a certain period (often 10 to 15 years), which reduces the amount you receive.
Surrendering makes sense only if you no longer need life insurance coverage or if you need a large amount of cash and cannot access it another way. Once you surrender, you lose all death benefit protection, so your beneficiaries will receive nothing when you pass away.
What happens to your death benefit with each option
| Option | Death Benefit Impact | Tax on Withdrawal | Can You Repay? |
|---|---|---|---|
| Withdrawal | Reduced by amount withdrawn | Yes, on gains above premiums paid | No — money is gone |
| Policy Loan | Reduced by loan balance plus unpaid interest | No tax when borrowed; interest may be taxable if policy lapses | Yes, anytime |
| Surrender | Eliminated — coverage ends | Yes, on gains above premiums paid | No — policy is closed |
Tax and legal issues to consider before cashing out
Before you withdraw or borrow against your policy, check whether you are receiving any means-tested benefits such as Medicaid, Supplemental Security Income (SSI), or housing information. Cashing out a policy can increase your countable assets and make you temporarily ineligible for these programs. The rules vary by program and state, so contact your local benefits office to ask how a withdrawal or loan would affect your situation.
If you owe money to creditors, a policy surrender or large withdrawal can also create complications. In some states, creditors can pursue life insurance cash value in a lawsuit, though many states protect life insurance from creditor claims. If you are in debt or facing a lawsuit, speak with a lawyer in your state before cashing out.
If your policy is part of a divorce settlement or a court order, you may not be able to withdraw or borrow without the other party's permission. Check any legal documents that mention the policy before you contact your insurance company.
How to request a withdrawal, loan, or surrender
Contact your insurance company directly — the phone number is on your policy statement or the company's website. Tell them which option you want: a withdrawal, a policy loan, or a surrender. They will send you forms to sign and explain the tax consequences based on your specific policy.
Before you call, gather your policy number and have a clear idea of how much money you need. The insurance company will tell you how much cash value is currently available, what surrender charges explore, and what the interest rate is on a policy loan. Processing typically takes one to two weeks.
If you are unsure which option is best for your situation, consider speaking with a tax professional or financial advisor. They can help you understand the tax impact and whether cashing out makes sense given your other financial options.
Frequently Asked Questions
What is the difference between a withdrawal and a policy loan?
A withdrawal takes money out permanently and reduces your death benefit dollar-for-dollar. A policy loan lets you borrow against your cash value and repay it later, but unpaid interest accumulates and reduces your death benefit. Withdrawals are taxed on gains; loans are not taxed when you receive them.
Can I withdraw from a term life insurance policy?
No. Term life insurance has no cash value, so there is nothing to withdraw. Only permanent policies (whole life, universal life, variable universal life) build cash value over time.
Will cashing out my policy affect my taxes?
A withdrawal or surrender is taxed as income on the amount above your total premiums paid. A policy loan is not taxed when you receive it, but unpaid interest may be taxed if the policy lapses. Speak with a tax professional about your specific situation.
What happens if I take a policy loan and never repay it?
The loan balance and unpaid interest reduce your death benefit. If the loan and interest grow larger than your cash value, your policy can lapse and coverage ends. Your beneficiaries will receive nothing.
Can I get my money back if I surrender my policy and then change my mind?
Once you surrender a policy, it is closed permanently. You cannot restart it. If you want coverage again, you would have to explore for a new policy and go through underwriting, which may result in higher premiums depending on your age and health.