Can You Cash Out a Life Insurance Policy?
There are four ways to tap the cash value of your life insurance — each with pros and cons.
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Some types of life insurance have a cash value, and those funds are there to use while you’re alive. In some cases, a permanent life insurance policy you’ve had for several years, such as whole life insurance, might be a helpful source of cash.
There are some downsides to cashing out a life insurance policy, however. Withdrawing cash from your life insurance could have tax implications, incur significant interest and/or reduce the death benefit of the policy.
Does your life insurance have cash value?
Not all life insurance policies have funds tucked away inside. To get cash out of your life insurance, it needs to:
Be a permanent life insurance policy with a cash value component.
Have earned enough cash value to withdraw or borrow against, which could take years or even decades.
Permanent life insurance often costs much more than term life, but when you pay your premium, part of it is funneled into a cash value account that you may be able to tap. Examples of permanent life insurance with cash value include whole life insurance, universal life insurance, variable universal life insurance and indexed universal life insurance.
Term life insurance doesn’t have a cash value, so you can’t withdraw money from it. It’s typically the most affordable life insurance, but the main trade-offs are that it lasts for a limited time and has no cash value.
» MORE: Term vs. whole life insurance
When can you cash out a life insurance policy?
It might take years before you can cash out a permanent life insurance policy.
First, it takes time for permanent life insurance policies to build up cash value. If your policy is relatively new, it’s unlikely to have much cash value yet. As you pay your premiums over time, a portion will be invested into your policy’s cash value, which will grow at either a fixed or variable rate.
Building cash value is like growing a savings account with small deposits over time. You’ll typically need to maintain a policy for several years before there’s enough cash value to be useful.
Plus, permanent life insurance policies have high surrender charges — or early withdrawal penalties — for the first 10 to 15 years the policy is active, so that cost might be prohibitive.
The cash value of your policy can be much less than the total premiums you’ve paid or the face amount of life insurance you bought. The type of life insurance, premiums and performance of the policy might determine how close the cash value comes to matching the life insurance death benefit amount. So, if you have a $500,000 policy, it’s unlikely your cash value will grow to that amount unless you make additional contributions.
» MORE: Best life insurance companies
Four ways to tap life insurance cash value
If your permanent life insurance policy has sufficient cash value, you might be able to access the money, but taking cash out of your life insurance policy is a decision requiring some care.
Details differ from one policy to the next, so be sure to read your contract or check with your agent before you take action. Here are four options to consider.
1. Surrender the policy
If you no longer need life insurance, you can cancel your policy and receive the “surrender value,” which is the cash value minus any fees. This option might give you access to the most cash, but it also means the end of your coverage.
You can access your policy’s full cash value (minus applicable fees and/or penalties).
You’re no longer covered, so your beneficiaries won’t get a death benefit.
Penalties and/or fees can chip into available cash.
You might owe income taxes on part of the cash you receive.
» MORE: Who needs life insurance?
2. Make a partial withdrawal
You can usually withdraw part of the cash value in a permanent life policy without surrendering it entirely. Withdrawing cash from your policy lets you keep your coverage in place, but the death benefit that goes to your beneficiaries might be smaller.
Your life insurance policy remains in effect.
You’re not required to pay back the money you withdraw.
Cash received is probably less than the total you’ve paid in, so it wouldn’t be subject to income taxes.
The death benefit paid to your beneficiaries is reduced.
Policies can have limits on when or how much you can withdraw.
Fees and/or penalties might eat into the amount you receive.
» MORE: Is life insurance taxable?
3. Borrow from the policy
Many policies allow you to borrow against the cash value. Borrowing against life insurance might be easier than getting other kinds of loans. But it’s still a loan, so there’s interest to pay and consequences for not paying it back.
No credit check for approval.
Lower interest rates than personal loans or credit cards, on average.
Choose your own schedule for when and how to repay the loan.
Your policy’s cash value continues to grow even if you’ve borrowed against it.
It might take years to build up enough cash value to borrow against.
There’s still interest, which could add up over time.
Unpaid loan balances could reduce your death benefit or cause your policy to lapse.
Potential tax implications if you don’t repay your loan or your policy lapses.
4. Cover your premium
If you need money to pay bills, and one of those bills is the life insurance premium itself, your cash value can come in handy. You may be able to skip making out-of-pocket premium payments on your whole life policy.
Your policy remains in effect.
Lower monthly bills could free up cash for other expenses.
Could be a simpler source of cash than withdrawals or loans.
Covering premiums probably won’t provide a large amount of cash at once.
Cash value used to cover premiums isn’t available if you later need to borrow or withdraw from your policy.
Any type of withdrawal or loan can have a long-term impact on the performance of your policy. Before committing to pulling cash value from your policy for whatever reason, request an “in-force illustration” from your life insurance company. This outlines how the move you’re planning to make will affect your policy’s financial performance.
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