Yes, you can withdraw money from most life insurance policies, but how much you can take and what it costs you depends on the type of policy you own
Term life insurance — the cheapest kind — has no cash value, so there is nothing to withdraw. Permanent policies like whole life, universal life, and variable universal life build up a cash value over time as you pay premiums. That cash value is yours to access, though withdrawing it reduces your death benefit and may trigger taxes or surrender charges.
The three main ways to access the money are a direct withdrawal, a loan against the cash value, or surrendering the policy entirely. Each has different tax consequences and affects what your beneficiaries receive. Understanding which option makes sense requires knowing your policy type, how much cash value you have built up, and what you need the money for.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can withdraw; term policies have none.
- A direct withdrawal reduces your death benefit dollar-for-dollar and may be taxed on the amount above what you paid in premiums.
- A policy loan lets you borrow against your cash value without triggering immediate taxes, but unpaid loans reduce your death benefit and accrue interest.
- Surrendering the policy gives you all remaining cash value but ends your coverage and may result in a large tax bill if the cash value exceeds your total premiums paid.
- You should contact your insurance company or review your policy documents to find your current cash value before making any withdrawal decision.
How cash value builds and what you can actually access
When you own a permanent life insurance policy, part of each premium you pay goes toward the death benefit and part goes into a cash value account. That account earns interest or investment returns depending on the policy type. Over time, this cash value grows tax-deferred — meaning you do not pay taxes on the growth as long as the money stays in the policy.
The cash value is not the same as your death benefit. If your policy has a $500,000 death benefit and $50,000 in cash value, you can access up to $50,000 while alive, but your beneficiary receives $500,000 when you die (assuming you have not borrowed against it). Your insurance company will tell you the current cash value in your annual statement or policy document. If you cannot find it, call your insurer — they can give you an exact figure in minutes.
The amount you can withdraw is limited to the cash value minus any outstanding loans or surrender charges. Some policies charge a surrender charge if you withdraw or surrender during the first 10 to 15 years of ownership. This charge is a percentage of the cash value and decreases over time. Your policy documents spell out when surrender charges apply and how much they are.
Direct withdrawal: taking money out of your policy
A direct withdrawal is the simplest way to access your cash value. You contact your insurance company, request a withdrawal, and they send you a check. The money comes out of your cash value account, which immediately reduces your death benefit by the same amount. If you withdraw $10,000, your death benefit drops by $10,000.
Tax treatment depends on how much you withdraw. Money you withdraw up to the amount of premiums you have paid in is not taxed. Anything above that is taxed as ordinary income in the year you withdraw it. For example, if you paid $30,000 in premiums over 10 years and your cash value is now $45,000, withdrawing $20,000 means $15,000 is tax-free and $5,000 is taxable income. You will receive a Form 1099-R from your insurance company showing the taxable portion.
Withdrawals also trigger surrender charges if your policy is still in the surrender period. A $10,000 withdrawal might cost you $1,500 in charges if your policy is 5 years old and the surrender charge is 15 percent. These charges are separate from taxes and come directly out of the cash value before you receive your money.
Policy loans: borrowing against your cash value
Instead of withdrawing, you can borrow against your cash value. The insurance company lends you money using your cash value as collateral. You keep your policy in force, your death benefit stays the same, and you do not owe taxes on the loan itself. This is often the better choice if you want to keep your coverage and avoid a big tax bill.
Policy loans do accrue interest, usually at a rate set in your policy contract or tied to a market index. That interest is added to your loan balance. If you do not repay the loan, the unpaid balance and interest are deducted from your death benefit when you die. If your death benefit is $500,000 and you have an outstanding loan of $50,000 plus $5,000 in accrued interest, your beneficiary receives $445,000.
The advantage of a policy loan is flexibility — there is no set repayment schedule. You can repay whenever you want or let it ride. The disadvantage is that unpaid loans reduce what your family receives and can eventually consume your entire cash value if the loan balance grows faster than your policy earns. Some policies allow loans up to 90 percent of cash value; others cap it lower. Check your policy or call your insurer to learn the loan limit.
Surrendering your policy: cashing out completely
Surrendering means you give up the policy entirely and receive all remaining cash value as a lump sum. Your coverage ends immediately. This is the right choice only if you no longer need life insurance or have other coverage in place.
The tax bill can be substantial. You owe income tax on the amount by which your cash value exceeds your total premiums paid. If you paid $50,000 in premiums and your cash value is $80,000, you owe income tax on $30,000. That $30,000 is added to your income for the year and taxed at your ordinary income tax rate, which could be 22 percent, 24 percent, or higher depending on your bracket.
Surrender charges also apply if you are still in the surrender period. A policy that charges 10 percent per year for the first 10 years could cost you thousands in charges if you surrender early. After the surrender period ends (usually 10 to 15 years), there are no charges, only the tax on gains.
Comparing the three options side by side
| Option | How It Works | Death Benefit | Tax Impact | Best For |
|---|---|---|---|---|
| Direct Withdrawal | Take money out; cash value decreases | Reduced by withdrawal amount | Taxed on amount above premiums paid | Small, one-time needs; you still want some coverage |
| Policy Loan | Borrow against cash value; repay on your schedule | Stays the same unless loan grows too large | No immediate tax; unpaid loan reduces benefit at death | You need money but want to keep coverage and avoid taxes now |
| Surrender Policy | Give up policy; receive all cash value | Coverage ends | Taxed on amount above premiums paid | You no longer need life insurance |
What happens to your coverage after a withdrawal or loan
A withdrawal or loan does not end your policy — it just reduces the death benefit. Your premiums stay the same unless your policy requires you to pay higher premiums to keep the reduced benefit in force. Some policies automatically adjust; others let you choose. Ask your insurance company what happens to your premium obligation after you withdraw or borrow.
If your cash value drops too low, your policy could lapse. Most policies require a minimum cash value to stay active. If you withdraw or borrow so much that cash value falls below that minimum, your coverage ends and you lose the policy entirely. This is rare with small withdrawals but possible if you borrow heavily and do not repay.
A policy loan that grows unchecked can also cause a lapse. If the loan balance plus accrued interest eventually exceeds your cash value, the policy terminates. At that point, you owe income tax on the loan amount that exceeded your premiums paid, even though you no longer have coverage. This is why monitoring outstanding loans matters if you plan to keep the policy long-term.
Steps to take before you withdraw or borrow
First, contact your insurance company and request a current in-force illustration or policy statement. This document shows your cash value, any surrender charges, the loan limit, and the interest rate on policy loans. You cannot make an informed decision without these numbers.
Second, talk to a tax professional if the withdrawal or loan is large. A CPA or tax advisor can tell you exactly what your tax bill will be and whether the timing makes sense. Withdrawing in a low-income year is better than withdrawing in a high-income year.
Third, consider whether you still need the death benefit. If you do, a policy loan is usually better than a withdrawal or surrender because it keeps your coverage intact. If you do not need coverage anymore, surrendering might make sense — but only after you have confirmed you have other insurance or do not need any.
Frequently Asked Questions
Can I withdraw money from my life insurance without paying taxes?
Yes, but only up to the amount of premiums you have paid in. Withdrawals above that are taxed as ordinary income. For example, if you paid $40,000 in premiums and withdraw $50,000, the first $40,000 is tax-free and the remaining $10,000 is taxable. Policy loans are also tax-free when you take them out, though unpaid loans reduce your death benefit.
What is the difference between a withdrawal and a policy loan?
A withdrawal reduces your death benefit immediately and may be taxed. A policy loan keeps your death benefit the same, is not taxed when you take it, but accrues interest and reduces your benefit if you do not repay it. Loans are better if you want to keep coverage; withdrawals are simpler if you do not mind a smaller death benefit.
Will withdrawing money end my life insurance policy?
No, a single withdrawal will not end your policy. Your coverage continues with a reduced death benefit. However, if you withdraw so much that your cash value falls below the policy minimum, your coverage could lapse. Ask your insurance company what the minimum cash value is for your policy before you withdraw.
Can I borrow from my life insurance if I have term life insurance?
No. Term life insurance has no cash value, so there is nothing to borrow against or withdraw. Only permanent policies like whole life, universal life, and variable universal life build cash value. If you own term insurance, you cannot access any money from it while alive.
What happens to a policy loan if I die before I repay it?
The unpaid loan balance and any accrued interest are subtracted from your death benefit. If your death benefit is $300,000 and you have an outstanding loan of $40,000 plus $3,000 in interest, your beneficiary receives $257,000. This is why monitoring loans matters if you want to preserve the full benefit for your family.