Yes, you can take money from a life insurance policy while you're alive, but the method depends on the type of policy you own

Most permanent life insurance policies — whole life, universal life, and variable universal life — build a cash value over time. You can access this money through a withdrawal, a loan, or by surrendering the policy. Term life insurance has no cash value, so this option doesn't exist for those policies. The amount you can take, how much it costs you, and what happens to your death benefit all depend on which method you choose and how much you take out.

Accessing your cash value is different from filing a claim. You don't need to prove illness or hardship. The insurance company straightforward moves money from your policy's cash account to you. However, taking money out reduces the death benefit your beneficiaries will receive, and you may owe taxes or surrender charges depending on how you do it.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can access; term life insurance does not.
  • You can withdraw cash value directly, borrow against it as a policy loan, or surrender the entire policy for its cash surrender value.
  • Withdrawals up to your cost basis (what you paid in premiums) are typically not taxed, but amounts above that may be taxable as income.
  • Taking money out reduces your death benefit dollar-for-dollar, and policy loans charge interest that compounds if unpaid.
  • Surrendering a policy ends your coverage permanently and may trigger a surrender charge that reduces the amount you receive.

How cash value builds in permanent life insurance

When you pay a premium on a whole life or universal life policy, part of that payment goes toward the insurance cost and part goes into a cash account within the policy. This cash value grows over time, either at a may provide rate (whole life) or at a rate tied to market performance or an index (universal life and variable universal life). You own this cash value — it's yours to access.

The cash value grows tax-deferred, meaning you don't pay income tax on the growth while the money sits in the policy. However, the moment you withdraw or borrow that money, tax rules explore. The longer you hold the policy, the more cash value typically accumulates, which is why accessing it is usually an option only after several years of payments.

Withdrawals: taking money directly from your cash value

A withdrawal is the simplest way to access cash value. You contact your insurance company and request a withdrawal of a specific amount. The company sends you a check or deposits the money into your bank account. The withdrawal is processed within days to a few weeks depending on the insurer.

Withdrawals are taxed only on the amount that exceeds your cost basis — the total premiums you've paid into the policy. If you've paid $50,000 in premiums and your cash value is $65,000, you can withdraw up to $50,000 with no tax. Any withdrawal above $50,000 is taxed as ordinary income in the year you withdraw it. Your insurance company will send you a 1099-R form at tax time if you withdraw more than your cost basis.

The death benefit is reduced by the exact amount you withdraw. If your policy had a $500,000 death benefit and you withdraw $20,000, your beneficiaries will receive $480,000 when you die (assuming no other changes to the policy). Some policies allow you to restore the death benefit by paying additional premiums, but this is not automatic.

Policy loans: borrowing against your cash value

Instead of withdrawing cash value, you can borrow against it. The insurance company lends you money using your cash value as collateral. You don't have to repay the loan during your lifetime — the outstanding loan balance is straightforward subtracted from the death benefit when you die. If you do repay the loan, you pay back the principal plus interest.

Policy loans typically charge interest at a rate set in your policy contract, usually between 4% and 8% depending on the policy type and when it was issued. The interest compounds annually, meaning unpaid interest is added to the loan balance and earns interest itself. If you never repay the loan, the accumulated interest and principal are deducted from what your beneficiaries receive.

A key advantage of policy loans is that the loan proceeds are not taxable income — you're borrowing your own money, not receiving income. However, if the loan balance plus accumulated interest exceeds your cash value, the policy may lapse and you could face unexpected tax consequences. Some policies have safeguards that prevent this, but you should confirm with your insurer before taking a large loan.

Surrendering the policy: cashing out completely

Surrendering a policy means you give it back to the insurance company and receive the cash surrender value — the cash value minus any surrender charges. This ends your coverage permanently. You cannot reinstate the policy later, and your beneficiaries will receive nothing when you die.

Surrender charges are fees the insurance company deducts from your cash value if you cancel the policy within a certain period, usually 10 to 15 years from the issue date. These charges decline over time and eventually disappear. A policy issued 20 years ago likely has no surrender charge, but a policy issued 2 years ago might have a charge of 5% to 10% of the cash value.

The amount you receive above your cost basis is taxed as ordinary income. If you surrender a policy with $100,000 in cash value and you've paid $60,000 in premiums, the $40,000 gain is taxable. You'll receive a 1099-R form for tax reporting. Surrendering is rarely the best option unless you no longer need the death benefit and want to access all your cash value at once.

Tax consequences of accessing cash value

The tax treatment depends on how much you've paid in premiums versus how much your cash value has grown. The IRS calls the total premiums you've paid your "cost basis." Withdrawals and surrenders are taxed only on the amount above your cost basis.

If you've paid $40,000 in premiums and your cash value is $50,000, you have a $10,000 gain. A withdrawal of $8,000 is tax-free (it's under your cost basis). A withdrawal of $12,000 means $10,000 is tax-free and $2,000 is taxable income. The taxable portion is added to your income for the year and taxed at your ordinary income tax rate.

Policy loans are not taxable when you take them out. However, if a policy lapses while you have an outstanding loan, the forgiven loan balance becomes taxable income. This is an uncommon but serious scenario — if you take a large loan and stop paying premiums, the policy could lapse and trigger an unexpected tax bill.

Impact on your death benefit and policy performance

Every dollar you withdraw reduces your death benefit by that same dollar. A $500,000 policy with a $30,000 withdrawal becomes a $470,000 policy. This reduction is permanent unless you pay additional premiums to restore the benefit, which is not automatic and may not be possible depending on your age and health.

Withdrawals and loans also reduce the cash value available for future growth. If your cash value grows at 3% annually and you withdraw $20,000, you lose not only that $20,000 but also the future growth on it. Over 10 years, that $20,000 could have grown to roughly $26,800 at 3% annual growth. This opportunity cost is real but often overlooked.

Policy loans don't reduce the death benefit when ready, but the accumulated interest does. If you borrow $30,000 at 6% interest and never repay it, after 10 years the loan balance is roughly $53,700. Your beneficiaries receive $30,000 less in death benefit, plus they lose the benefit of the additional $23,700 in interest that accumulated.

Alternatives to cashing out your policy

If you need money but want to keep your coverage, a policy loan is usually better than a withdrawal because it doesn't reduce your death benefit when ready and the loan proceeds aren't taxed. If you're certain you no longer need the death benefit, surrendering may make sense, but only after comparing the surrender charge to the cash value you'll receive.

Some people sell their life insurance policy to a third party through a process called a life settlement. A life settlement company purchases your policy, pays you a lump sum (usually more than the cash surrender value but less than the death benefit), and becomes the new owner. The buyer collects the death benefit when you die. Life settlements are complex, involve fees, and have tax implications — they're typically only considered by older policyholders or those with serious health conditions.

Frequently Asked Questions

Can I withdraw from a term life insurance policy?

No. Term life insurance has no cash value, so there is nothing to withdraw. Term policies provide pure death benefit coverage for a set period (10, 20, or 30 years) and build no savings component. If you need to access money, you would need to cancel the policy, but you would receive nothing in return.

Will taking a policy loan affect my credit score?

No. A policy loan is not reported to credit bureaus and does not appear on your credit report. The insurance company is not lending you money in the traditional sense — you're borrowing against your own cash value. Your credit score is unaffected, and the loan does not require a credit check.

What happens if I take a withdrawal and then die before my beneficiaries claim the death benefit?

Your beneficiaries receive the reduced death benefit. If your policy was $500,000 and you withdrew $50,000, they receive $450,000 (minus any outstanding policy loans or unpaid premiums). The withdrawal is permanent — it cannot be reversed, even if you die shortly after taking it.

Can I withdraw my cash value if I'm behind on premium payments?

Yes, in most cases. You can withdraw cash value even if your policy is in danger of lapsing due to missed payments. However, if the policy lapses before you withdraw, the cash value may no longer be available. If you're behind on payments, contact your insurance company when ready to discuss your options before the policy lapses.

Is there a limit to how much cash value I can withdraw?

You can withdraw up to the full cash value, but withdrawing everything is the same as surrendering the policy. Most insurers allow you to withdraw any amount up to your cash value without penalty, but withdrawals above your cost basis are taxed. Some policies have minimum cash value requirements to keep the policy in force — check your policy documents or call your insurer.