You can cash out some types of life insurance, but not all, and the process depends on which kind of policy you own

Term life insurance cannot be cashed out. It covers you for a set number of years—10, 20, or 30 years—and pays a death benefit only if you die during that term. If you stop paying premiums or the term ends, the policy simply expires. There is no cash value to withdraw.

Permanent life insurance—which includes whole life, universal life, and variable universal life policies—builds cash value over time. You can access this money while you are alive through a withdrawal, a loan, or by surrendering the policy entirely. The amount available depends on how long you have held the policy and how much you have paid in premiums.

Cashing out a life insurance policy has real consequences. You may owe income taxes on the amount you withdraw, your death benefit shrinks or disappears, and you lose the protection your family counted on. Before you cash out, understand what you are giving up and whether other options exist.

Key Takeaways

  • Term life insurance has no cash value and cannot be cashed out under any circumstances.
  • Permanent life insurance policies (whole life, universal life) accumulate cash value that you can access through withdrawals, loans, or full surrender.
  • Withdrawing cash reduces your death benefit dollar-for-dollar, and amounts over your basis (premiums paid) are taxed as ordinary income.
  • Policy loans let you borrow against your cash value without triggering immediate taxes, but unpaid loans reduce the death benefit and accrue interest.
  • Surrendering a policy ends it permanently and may result in a large tax bill if the cash value exceeds what you paid in.

The difference between term and permanent life insurance

Term life insurance is pure protection. You pay a monthly or annual premium, and if you die during the term, your beneficiary receives the death benefit. If you live past the term or stop paying, the policy ends with no payout and no cash value. This is why term insurance is cheaper—the insurance company is only on the hook if you die within a specific window.

Permanent life insurance is designed to last your entire life and includes a savings component called cash value. A portion of each premium you pay goes into this account, which grows tax-deferred. The insurance company invests this money (in whole life) or you direct the investments (in variable universal life). Over time, the cash value can become substantial—sometimes tens of thousands of dollars—and you own it regardless of whether you ever file a claim.

If you own a permanent policy and want to access money, you have three paths: withdraw cash, borrow against it, or surrender the policy. Each has different tax and benefit consequences.

Withdrawing cash from your policy

A withdrawal takes money directly out of your cash value account. The first dollars you withdraw are usually tax-free up to the amount you have paid in premiums (your basis). Anything beyond that is taxed as ordinary income in the year you withdraw it.

For example, if you paid $50,000 in premiums over 15 years and your cash value is now $75,000, you can withdraw $50,000 tax-free. If you withdraw another $10,000, that $10,000 is taxable income. The insurance company will report this to the IRS on a Form 1099-R.

When you withdraw cash, your death benefit drops by the amount you took out. If your policy had a $500,000 death benefit and you withdraw $50,000, your beneficiary will receive $450,000 if you die. Some policies allow the death benefit to stay the same, but the insurance company charges higher premiums to maintain that protection, and you may not have that option depending on your policy terms.

Withdrawals are permanent. Once you take the money out, that portion of cash value is gone and no longer earns returns. If you think you might need the money back later, a policy loan may be a better choice.

Taking a loan against your cash value

A policy loan lets you borrow money from your insurance company using your cash value as collateral. You do not have to prove income or creditworthiness—the loan is secured by your own money. The interest rate is set by your policy, typically between 5% and 8%, though some older policies have lower rates.

Policy loans are not taxable events. You do not owe income tax when you take the loan, and you do not owe tax on the interest. This is a major advantage over withdrawals if you need a large sum and want to avoid a tax bill in the current year.

However, unpaid loans reduce your death benefit. If you borrow $30,000 and never repay it, your beneficiary receives $30,000 less. The loan also accrues interest, which compounds over time. If you die with an outstanding loan balance, the insurance company deducts the loan plus accrued interest from the death benefit before paying your beneficiary.

If you stop paying premiums on a policy with an outstanding loan, the insurance company may use the cash value to cover premiums and pay down the loan. Eventually, if the cash value runs out, the policy lapses and you lose coverage. Some policies allow you to use the cash value to keep the policy in force, but this is not automatic—you need to understand your specific policy terms.

Surrendering your policy for cash

Surrendering means you give the policy back to the insurance company and receive the full cash value in a lump sum. The policy ends immediately, your death benefit disappears, and you have no more coverage.

Surrender is taxable if your cash value exceeds your basis. If you paid $80,000 in premiums and your cash value is $120,000, you owe income tax on the $40,000 gain. The insurance company will send you a Form 1099-R reporting the taxable amount.

Surrender makes sense only if you no longer need the death benefit and want access to all your cash at once. If you still need some coverage, a withdrawal or loan preserves part of your protection. If you are considering surrender because you cannot afford premiums, talk to your insurance agent first—you may be able to reduce the death benefit, switch to a lower-premium policy, or use the cash value to pay premiums for a while longer.

Tax consequences of cashing out

The tax treatment depends on which method you use. Withdrawals and surrenders trigger income tax on gains (cash value minus premiums paid). Policy loans do not create a tax bill at the time you borrow, but if the loan is forgiven—such as when you die with an unpaid balance—the forgiven amount may be taxable to your estate.

If you are over 59½, withdrawals and surrenders are taxed as ordinary income but not subject to an early withdrawal penalty. If you are under 59½, the same income tax applies, but there is no additional penalty—life insurance is not subject to the 10% early withdrawal penalty that applies to retirement accounts.

Keep records of all premiums you have paid. This is your basis, and it determines how much of any withdrawal or surrender is tax-free. If you have lost your policy documents, contact your insurance company and ask for a statement showing your basis and current cash value.

Alternatives to cashing out your policy

Before you cash out, consider whether you actually need to. If you need money for a specific expense, a policy loan may give you the cash without the tax hit. If you need ongoing income, some policies allow you to take systematic withdrawals over time, which may keep you in a lower tax bracket than a lump sum.

If you no longer need the full death benefit but still want some coverage, you can reduce the death benefit and take the excess cash value as a withdrawal. This keeps the policy in force at a lower cost while giving you access to money.

If you own multiple policies, you might cash out one while keeping others. This lets you preserve some protection while accessing funds from the policy you need least.

If you are struggling to pay premiums, contact your insurance company before you surrender. Many companies offer options like reducing the death benefit, extending the premium payment period, or using the cash value to pay premiums temporarily. These moves keep you covered while you get back on your feet.

Frequently Asked Questions

Can I cash out a term life insurance policy?

No. Term life insurance has no cash value. When the term ends or you stop paying premiums, the policy expires with nothing to withdraw. If you need money, you cannot access it from a term policy.

What happens to my death benefit if I take a policy loan?

Your death benefit is reduced by the loan balance plus any accrued interest. If you borrow $25,000 and never repay it, your beneficiary receives $25,000 less. If you repay the loan, the full death benefit is restored.

Do I have to pay taxes on a policy loan?

No. Policy loans are not taxable when you take them out. However, if the loan is forgiven at your death, the forgiven amount may be taxable to your estate depending on the total value of your estate and your state's tax laws.

What is the difference between my basis and my cash value?

Your basis is the total amount of premiums you have paid into the policy. Your cash value is what the policy is currently worth, including investment growth. The difference between them is the gain, and this gain is taxable if you withdraw or surrender the policy.

Can I cash out my policy if I have a loan against it?

Yes, but the loan balance and accrued interest are deducted from the cash value you receive. If your cash value is $100,000 and you have an outstanding loan of $30,000 plus $5,000 in interest, you receive $65,000 after the loan is paid off.