The main benefit of life insurance is that you can leave money to your beneficiaries when you die. However, there are circumstances that allow you to claim cash from a policy while you’re still living.
If your policy has a cash value component or living benefits, there are ways to access cash while you’re still alive, but accessing these funds will take away from the total amount you leave to your loved ones when you die.
When it makes sense to take out money from your life insurance
You’ll get the maximum reward from your life insurance policy after you die, when the insurer pays the death benefit to your beneficiaries. In most cases, it won’t make sense for you to access your coverage while you’re alive.
However, there are a few situations where you can benefit from your policy while you’re still living, 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.
You qualify for living benefits through a rider like a terminal illness rider.
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4 ways to access your policy’s cash value
If you have a permanent life insurance policy, it’ll likely come with a cash value component. The cash value will grow with each premium you pay and with interest. Eventually, you’ll be able to leverage this account if you choose.
There are four main ways to take advantage of the cash value: 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.
1. Withdraw money
Once a cash value has accumulated on your life insurance policy, you’ll have the option of withdrawing that money. Doing so will reduce the amount of interest you’re able to earn on the cash value and, ultimately, 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.
2. 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 a credit check like you would if you took 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.
3. 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.
4. 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. And your beneficiaries will no longer be covered in the event of your death.
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. 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% and 40% 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.
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.
Any money you don’t pay back will be deducted from the death benefit your beneficiaries will receive.
What types of life insurance policies let you cash out while alive?
Whole life insurance
Whole life insurance lasts for the rest of your life and almost always 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 significantly higher than 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, which usually come in the form of riders — policy add-ons — that allow you to make a claim on your policy if you experience a qualifying event.
Some living benefits are free, like the terminal illness death benefit rider, which allows you to claim up to 50% of your death benefit if you’re diagnosed with a terminal illness.
Other benefits can be added for a cost, like the long-term care rider, which allows you to claim money for medical care if you qualify.
If you do want living benefits with your insurance policy, these need to be included when the policy is first issued. You can’t add them later on, so make sure you ask your life insurance agent about living benefits when you have your initial application call.
At Policygenius, our experts are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice.
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 is if you no longer need the death benefit 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 any fees and taxes you’ll have to pay.
Frequently asked questions
Can you cash in a life insurance policy before you die?
You can’t claim the full death benefit from your life insurance policy before you die, but you may be able to access money from your policy if it has a cash value component or living benefits.
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% to 40% of the cash value of the policy. 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. For most policies, this takes at least 10 years. And you can’t borrow more than the total cash value that’s accumulated.
