Yes, you can take money out of your life insurance policy, but only certain types let you do it, and the amount you can withdraw depends on how much cash value your policy has built up.
Most life insurance falls into two categories: term life insurance and permanent life insurance. Term policies expire after a set number of years (10, 20, or 30 years) and have no cash value — you cannot withdraw from them. Permanent policies, which include whole life and universal life insurance, build cash value over time, and that's what you can access.
The three main ways to take money out are withdrawals, loans, and surrendering the policy. Each one works differently and has different tax consequences and effects on your death benefit. Understanding which option fits your situation matters because the wrong choice can leave you with a smaller payout to your beneficiaries or an unexpected tax bill.
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- A withdrawal takes money directly from your cash value and permanently reduces your death benefit by the amount withdrawn.
- A policy loan lets you borrow against your cash value and keep your death benefit intact, but unpaid loans with interest can eventually consume your policy.
- Surrendering the policy gives you all remaining cash value but ends your coverage completely and may trigger income taxes on gains above what you paid in premiums.
- Withdrawals and loans up to the amount of premiums you paid in are usually tax-free; anything beyond that is taxed as ordinary income.
How withdrawals work and what they cost you
A withdrawal takes cash directly from your policy's cash value and sends it to you. The money is yours to keep — you don't have to repay it. But the trade-off is immediate: your death benefit shrinks by the exact amount you withdraw. If your policy has a $100,000 death benefit and $30,000 in cash value, and you withdraw $10,000, your beneficiaries will receive $90,000 when you die.
The tax treatment depends on how much you withdraw. Money you take out up to the total amount of premiums you've paid in is tax-free. Anything beyond that is taxed as ordinary income in the year you withdraw it. Your insurance company will send you a 1099-R form at tax time showing how much of your withdrawal is taxable. If you withdraw $15,000 and you've paid $12,000 in premiums over the years, $3,000 of that withdrawal counts as taxable income.
Withdrawals also carry a practical risk: if you withdraw too much, your policy can lapse. Once the cash value hits zero, the policy ends and your coverage is gone. Some policies have a minimum cash value they need to stay active, so check with your insurance company before withdrawing large amounts.
Policy loans: borrowing against your cash value
A policy loan lets you borrow money using your cash value as collateral. Unlike a withdrawal, the loan doesn't reduce your death benefit — your full benefit stays in place. You borrow the money, and when you die, the insurance company deducts what you owe (plus any unpaid interest) from the death benefit before paying your beneficiaries.
Policy loans typically charge interest, though the rate is usually lower than a bank loan or credit card. The rate varies by policy and insurance company; check your policy documents or call your insurer for the exact rate. You can repay the loan on your own schedule — there's no fixed payment plan — but unpaid interest compounds over time. If you never repay the loan, the interest keeps growing and can eventually eat up your entire cash value, causing the policy to lapse.
The tax advantage of a policy loan is that the money you borrow is not taxable income. You're borrowing against your own cash value, not receiving income. However, if your policy lapses while you have an outstanding loan, the IRS may treat the unpaid loan balance as taxable income in that year.
Surrendering your policy for its full cash value
Surrendering means you give up the policy entirely and receive all remaining cash value. Your coverage ends immediately, and your beneficiaries receive nothing when you die. This is a permanent decision — once surrendered, the policy is gone.
The cash value you receive is taxable on the amount that exceeds your total premiums paid. If you've paid $50,000 in premiums and your cash value is $75,000, you owe income tax on $25,000. This can be a significant tax hit in a single year, so some people spread the surrender over time by taking withdrawals instead, which may lower their tax bracket impact.
Surrender makes sense only if you no longer need the life insurance coverage and want access to all your cash at once. If you think you might need coverage again later, a withdrawal or loan is usually better because you keep the policy active.
Tax implications and how to calculate what you owe
The IRS taxes life insurance withdrawals and loans differently, and the rules depend on whether your policy is classified as a Modified Endowment Contract (MEC). Most permanent policies are not MECs, but some are, and MECs have stricter tax rules. Your insurance company can tell you if your policy is a MEC.
For non-MEC policies, withdrawals are taxed using the "first-in, first-out" method: money you withdraw up to your total premiums paid is tax-free, and anything beyond that is taxed as ordinary income. For MEC policies, withdrawals are taxed in reverse — gains come out first and are taxable, then your premiums come out tax-free. This makes MECs less favorable for withdrawals.
Keep records of how much you've paid in premiums over the life of the policy. Your insurance company can provide this information, usually called your "cost basis." When you withdraw or surrender, you'll need this number to calculate your tax liability. If you're unsure, ask your tax preparer or the insurance company to help you figure it out before you withdraw.
When taking money out makes sense
Taking money from your life insurance works best when you have a genuine short-term need and you're confident you won't need the full death benefit later. Common situations include covering a medical expense, making a large repair, or bridging a gap between jobs. The key is that you still want your coverage to exist afterward.
A policy loan is usually the better choice if you plan to repay the money, because it keeps your death benefit intact and avoids immediate tax consequences. A withdrawal makes sense if you don't plan to repay and you're comfortable with a smaller death benefit. Surrendering only makes sense if you've decided you don't need life insurance anymore.
Before you withdraw or borrow, contact your insurance company and ask three questions: What is my current cash value? How much can I withdraw or borrow without risking policy lapse? What are the tax consequences for my specific situation? The answers will help you decide which option fits.
What happens if you don't repay a policy loan
If you take a policy loan and never repay it, the unpaid balance and accrued interest stay on the books. The interest compounds annually, meaning you owe interest on the interest. Over time, the loan balance can grow to equal or exceed your cash value.
When that happens, your policy lapses — it ends because there's no cash value left to support it. At that point, the IRS may treat the unpaid loan as taxable income in the year the policy lapses. You could owe a large tax bill on money you thought was just a loan. This is why policy loans are best used when you have a realistic plan to repay them, or when you're comfortable with the risk that the policy might eventually lapse.
Frequently Asked Questions
Can I withdraw money from a term life insurance policy?
No. Term life insurance has no cash value, so there is nothing to withdraw. Only permanent policies like whole life and universal life build cash value. If you have term insurance and need cash, you would need to either get a loan or credit from another source, or convert your term policy to a permanent policy if your insurer offers that option.
Will withdrawing money affect my death benefit?
Yes, withdrawals reduce your death benefit dollar-for-dollar. If you withdraw $5,000, your beneficiaries receive $5,000 less. Policy loans do not reduce your death benefit unless the loan goes unpaid and eventually causes the policy to lapse. Surrendering the policy ends your coverage completely.
How long does it take to get money from a policy withdrawal or loan?
Most insurance companies process withdrawals and loans within one to two weeks. Some offer faster processing if you request it, though there may be a fee. Call your insurance company to ask about their timeline and whether expedited options are available.
Can I take money out if I'm behind on my premiums?
Yes, you can usually withdraw or borrow even if you've missed payments, as long as your policy still has cash value. In fact, some people use a withdrawal or loan to catch up on overdue premiums and keep the policy active. However, check with your insurer about their specific rules.
What's the difference between a withdrawal and a loan in terms of taxes?
Withdrawals are taxed on the amount above your total premiums paid. Loans are not taxed when you receive them, but unpaid loans can become taxable if the policy lapses. Withdrawals are simpler tax-wise because you know immediately what's taxable; loans create uncertainty if you don't repay them.