Yes, you can cash out most life insurance policies, but the amount you receive depends on the type of policy and how long you've held it

Life insurance policies fall into two broad categories: term life and permanent life (whole life, universal life, variable universal life). Term policies have no cash value — they pay a death benefit only if you die during the coverage period, then expire. Permanent policies build cash value over time, and that's what you can access.

The process of cashing out is called surrendering the policy. When you do, the insurance company sends you the cash surrender value, which is the cash value minus any outstanding loans against the policy and surrender charges. You lose all coverage once you surrender, so this is a permanent decision.

How much you receive depends on how many years you've paid premiums. In the first few years, surrender charges can be steep — sometimes 10 percent or more of the cash value. After 10 to 15 years, these charges typically drop or disappear entirely. A policy that's been in force for 20 years will usually have minimal or no surrender charge.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life) have cash value you can access; term policies have none.
  • Surrendering a policy means you receive the cash surrender value minus any loans against it and surrender charges, and your coverage ends immediately.
  • Surrender charges are highest in the first few years and typically decline or disappear after 10 to 15 years of payments.
  • You can also borrow against the cash value without surrendering, which keeps your coverage in place but creates a debt against the death benefit.
  • If you need money but want to keep some coverage, you can surrender part of the policy or reduce the death benefit instead of cashing out entirely.

The difference between cashing out and borrowing against your policy

Surrendering the policy and borrowing against it are two different paths. When you surrender, you get the cash value, lose the insurance, and the transaction is done. When you borrow, you keep the policy and your coverage stays active, but you owe the insurance company money with interest.

Policy loans typically charge interest at a rate set in your policy — often 5 to 8 percent, though some policies have variable rates. The loan is repaid from the death benefit when you die, so your beneficiary receives less. If you don't repay the loan and it grows to exceed the cash value, the policy can lapse and your coverage ends.

Borrowing makes sense if you want to keep your insurance in place and believe you can repay the loan. Surrendering makes sense if you no longer need the coverage or if the policy is costing more than it's worth to you.

How much you'll actually receive when you cash out

The amount depends on three things: the cash value your policy has built, any loans you've taken against it, and the surrender charge.

Cash value grows slowly in the early years of a permanent policy. In year one or two, you might have almost nothing. By year 10, you could have 30 to 50 percent of the premiums you've paid. By year 20, the cash value often approaches or exceeds the total premiums paid. The exact growth rate depends on the policy type, the insurance company's performance, and the interest rates or investment returns tied to your specific policy.

If you've borrowed against the policy, that loan balance is subtracted from the cash value. A $50,000 cash value with a $10,000 outstanding loan means you receive $40,000 (before surrender charges). Surrender charges are also subtracted. A policy with a $50,000 cash value and a 5 percent surrender charge leaves you with $47,500.

To find out your exact cash surrender value, contact your insurance company or check your policy statement. Most companies provide this figure annually, and you can request an updated calculation anytime.

Tax consequences of cashing out

The IRS taxes the gain on your policy, not the entire amount you receive. The gain is the cash value minus the premiums you've paid into the policy.

If you've paid $30,000 in premiums and the cash value is $40,000, your gain is $10,000. That $10,000 is taxable as ordinary income in the year you surrender. You'll receive a Form 1099-R from the insurance company, and you report this on your tax return.

If the cash value is less than the premiums you've paid — which can happen if surrender charges are steep or the policy performed poorly — you have no taxable gain. You simply receive the cash value with no tax bill.

This is different from a policy loan, which is not taxable when you take it out. However, if a policy loan exceeds the premiums you've paid, the excess becomes taxable.

When cashing out makes financial sense

Cashing out works if your circumstances have changed and you no longer need the coverage. Common reasons include: you've paid off major debts, your children are grown and financially independent, you've built substantial savings, or your health has declined and the premiums are no longer affordable.

It also makes sense if the policy is underperforming. Some universal life policies were sold with projections that didn't hold up — interest rates dropped, investment returns fell short, or the cost of insurance within the policy rose faster than expected. If your insurance company is now telling you that premiums will need to increase significantly to keep the policy in force, cashing out might be better than throwing more money at a policy that won't deliver what you expected.

Cashing out does not make sense if you still need the coverage. Life insurance protects your family from financial hardship if you die. If dependents rely on your income, if you have a mortgage, or if you have young children, surrendering your policy removes that protection. In those cases, borrowing against the policy or exploring a policy exchange (selling the policy to a third party) might be better options.

Alternatives to surrendering your entire policy

You don't have to cash out the whole thing. Some policies allow you to reduce the death benefit and receive part of the cash value while keeping reduced coverage in place. This keeps some insurance active and gives you access to cash.

Another option is a policy exchange or life settlement. If you're older or in poor health, a third-party buyer may pay more for your policy than the insurance company's surrender value. Life settlements typically require you to be at least 65 years old, though some buyers work with younger people. The buyer takes over the premiums and collects the death benefit when you die. You receive a lump sum that's often higher than the cash surrender value, but you lose all coverage.

You can also keep the policy and simply stop paying premiums if it has enough cash value. The insurance company will deduct the cost of insurance from the cash value each month until it runs out. This lets the policy stay in force without your payments, though the coverage will eventually lapse.

How to cash out your policy

Contact your insurance company directly — call the number on your policy or visit their website. Ask to surrender the policy and request the current cash surrender value. The company will send you a form to sign and return.

Once the company receives the signed form, they typically process the payment within one to two weeks. You'll receive a check or direct deposit for the cash surrender value minus any loans and surrender charges. The company will also send you a Form 1099-R for tax purposes.

Before you surrender, ask the company to confirm the exact amount you'll receive and whether there are any surrender charges. Also ask whether the policy has any outstanding loans. Some policies have provisions that allow you to surrender gradually or reduce the benefit instead of surrendering entirely — ask about these options too.

Frequently Asked Questions

What happens to my coverage when I cash out?

Your coverage ends immediately when you surrender the policy. Once the insurance company receives your signed surrender form, the policy is no longer in force. If you die before the check arrives, your beneficiary receives the death benefit, not the cash value. After the check clears, there is no death benefit to pay.

Can I cash out a term life policy?

No. Term policies have no cash value and cannot be surrendered for money. When a term policy expires, it simply ends. If you want to stop paying premiums on a term policy, you can cancel it, but you receive nothing in return.

Will I owe taxes on the money I receive?

You owe taxes only on the gain — the amount by which the cash value exceeds the premiums you've paid. If you've paid $30,000 in premiums and receive $35,000, you owe taxes on the $5,000 gain as ordinary income. If the cash value is less than your premiums, you owe no tax.

Can I change my mind after I surrender?

Once you surrender and the company processes the payment, the policy is gone and cannot be reinstated. Some companies offer a brief window (usually 10 to 30 days) to cancel the surrender request, but this varies by company and policy. If you think you might change your mind, ask about this before you sign.

What if I have a loan against the policy — do I still get paid?

Yes, but the loan balance is subtracted from the cash value. If your cash value is $50,000 and you owe $15,000 on a policy loan, you receive $35,000 (minus any surrender charges). The insurance company uses part of your cash value to pay off the loan before sending you the remainder.