There are cases where you can cash out a life insurance policy when you’re alive, but even if you have the option, it’s rarely in your best interest. Make sure you understand the costs and benefits of cashing out your life insurance policy before you make the transaction.
The main purpose of life insurance is to provide for your beneficiaries after you die. But if you have, for example, a permanent life insurance policy that has accumulated cash value, there are ways to access those funds while you’re still living. You’ll likely have to pay taxes and fees for this access. You also may have living benefits associated with your policy that will allow you to claim funds while you’re alive.
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What types of life insurance build cash?
The only types of life insurance policies that build cash value are permanent life insurance policies, including whole life insurance and universal life insurance. Term life insurance policies do not accumulate a cash value, but may offer living benefits.
Whole life insurance
Whole life insurance is a type of permanent life insurance that lasts for the rest of your life and typically accumulates a cash value. The rate of growth for the cash value component is determined by the life insurance company. The premiums you’ll pay on a whole life insurance policy are usually about five to 15 times the amount that you would pay for a term life insurance policy with the same face value.
Universal life insurance
Universal life insurance is a permanent life insurance policy that offers the option to invest the cash value that accumulates with your policy, so the growth of the cash value of your policy is dictated by the market.
Term life insurance
Term life insurance policies are primarily used for financial protection if you die. They don’t build cash value, but can sometimes offer living benefits in the form of riders. Some of the most common types of life insurance living benefits are the accelerated death benefit rider and the critical illness rider.
If you make a claim on these policies, the amount you receive is taken from your policy’s death benefit — but it’s an option to get cash from a term life policy while still alive.
4 ways to cash out life insurance
There are four main ways to cash out a life insurance policy while you’re still living: withdraw money, take out a loan, surrender your policy, and sell your policy. Depending on your financial needs, one of these methods may be a good fit for you. No matter which method you choose, the accumulated cash value on your policy will dictate the amount of cash you’ll have access to.
Withdraw money
Once a cash value has accumulated on your life insurance policy, you’ll have the option of withdrawing money from the accumulated cash value. This reduces the amount of interest you’re able to earn on the cash value and reduces the total amount of money you'll be able to leave to your beneficiaries. But if you need the cash in the short-term for things like living expenses or medical bills, withdrawing money could be a good option.
It’s important to remember you can only withdraw from the accumulated cash value, not the total death benefit amount. This means that you can’t withdraw more money than what the policy has accumulated in cash value.
For example, if you have a $500,000 life insurance policy that has accumulated $1,000 in cash value, the maximum amount you would be able to withdraw is $1,000, not $500,000.
Take out a loan
You can take out a loan through your permanent life insurance policy, but the loan amount can’t exceed the cash value of the policy. You’ll have to pay interest on your loan, but you won’t have to go through an application process or have a credit check like you would if you were taking out a personal loan.
If you die before you pay back the loan, the amount you owe — including interest — will be deducted from the total death benefit.
Surrender your life insurance policy
If you surrender your life insurance policy, you’ll lose your insurance coverage, but receive the total amount of the cash value minus any fees or penalties.
Surrendering means you’re giving up the life insurance policy, thereby forfeiting any death benefit. You also may have to pay surrender fees and taxes on the money you receive.
Sell your life insurance policy
You can sell your life insurance policy to a third party through a life settlement. If you do this, you’ll be able to claim the cash value of the policy and you’ll no longer need to make your premium payments.
However, you’ll also lose most of the death benefit and pay additional fees.
Do you have to pay taxes when you cash out life insurance?
You almost never have to pay taxes when you cash out a life insurance policy, but there are two exceptions.
If the amount you cash out exceeds the amount of premiums you’ve paid, you’ll have to pay taxes on the profit you make. You also may have to pay surrender fees or other financial penalties depending on the terms outlined in your policy.
If you have any unpaid loans from your policy — like if you let the policy lapse before you can pay a loan back — you’ll pay income taxes on the amount that you owe when the policy ends.
→ Learn more about when life insurance is taxable
Do you have to pay a penalty for taking out cash from your policy?
The specific penalties associated with cashing in your life insurance policy will be outlined in your policy agreement. It’s common to have to pay surrender fees between 10 percent and 40 percent of the cash value of your policy and taxes on any profit you receive.
Many insurance companies charge surrender fees if you cash in your policy within the first 10 to 15 years, but it could be more or less depending on the insurer. Each company will typically have a surrender schedule that outlines when fees apply.
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Pros and cons of cashing out life insurance
There are costs and benefits associated with cashing in a life insurance policy. Make sure that you understand the implications associated with the transaction before you commit to cashing in any part of your policy.
Pros
You’ll have access to cash while you’re still living.
It’s very easy to take out a loan at a competitive interest rate. There’s no application or collateral needed because you’re essentially borrowing from yourself.
Cons
There are often expenses associated with cashing in a life insurance policy.
You may be required to forfeit your life insurance policy.
When it makes sense to take out money from your life insurance
In most cases, it’s not in your best interest to take out money from a life insurance policy, but there are exceptions, like if you can’t qualify for a competitive personal loan or no longer need your insurance policy.
You might want to consider cashing out your life insurance policy in these cases.
You need cash in the short-term and are willing to give up long-term advantages.
You want to take out a personal loan for less than the amount of your policy’s cash value.
Your beneficiaries no longer need the support of the death benefit when you die.
Your insurance policy premiums have become too expensive and you can’t keep the policy.
Is it worth it to cash out a life insurance policy before death?
In general, the only time you benefit from cashing out a life insurance policy when you’re still living is if you no longer need the death benefit of the policy or if the short-term benefits of cashing out are more valuable to you than the longer-term advantages you’ll be forfeiting.
If you’re considering cashing out a life insurance policy, make sure you understand the fees and taxes you’ll have to pay.
Frequently asked questions
Is cashing in life insurance a good idea?
Cashing in a life insurance policy is usually not in your best interest, but there are some exceptions, like if you would have trouble attaining a competitive personal loan or you no longer need the insurance policy.
Is there a penalty for cashing out whole life insurance?
Depending on the terms of your life insurance policy you may need to pay a surrender fee, which can be anywhere from 10 percent to 40 percent of the cash value of the policy. Fees might apply for 10 to 15 years after buying a policy, but it’ll depend on the insurer. You’ll also need to pay taxes if the cash value exceeds the amount of premiums you paid on the policy.
How soon can I borrow money from my life insurance policy?
You can borrow money from your life insurance policy once the policy has accumulated a cash value component. You can’t borrow more than the total cash value that has accumulated on the policy.
Can you use life insurance before you die?
You can’t utilize the full death benefit from your life insurance policy before you die, but if your policy has a cash value component — many permanent life policies do — you’ll have means of accessing it while you’re still living. If your policy includes riders — or policy add-ons that provide supplemental coverage under special circumstances — that offer living benefits, you’ll be able to claim part of the death benefit if you experience a qualifying event. For example, if you’re diagnosed with a terminal illness.
