Yes, you can access cash from a life insurance policy while you're alive, but the method depends on the type of policy you own

Most term life insurance policies have no cash value and cannot be tapped before death. Permanent policies — whole life, universal life, and variable universal life — build cash value over time, and that money belongs to you. You can borrow against it, withdraw it, or surrender the policy entirely. Each option has different tax consequences and affects what your beneficiaries receive.

The amount available depends on how long you've held the policy and how much premium you've paid. A policy you bought last year will have little or no accessible cash. A policy you've paid into for 10 or 20 years may have substantial value. You'll need to contact your insurance company or review your policy documents to find out what's actually there.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life) build cash value that you can access; term policies have no cash component.
  • You can borrow against your policy's cash value, withdraw part of it, or surrender the entire policy for its cash surrender value.
  • Loans against your policy are not taxed, but withdrawals above what you paid in premiums are taxed as income.
  • Taking money out reduces the death benefit your beneficiaries receive, unless you repay what you borrowed.
  • A viatical settlement or life settlement lets you sell your policy to a third party for a lump sum, though you receive less than the full death benefit.

Policy loans: borrowing against your cash value

A policy loan lets you borrow money from your insurance company using your cash value as collateral. You don't have to repay it — if you die before repaying, the company deducts what you owe from the death benefit your beneficiaries receive. The loan itself is not taxed as income.

Interest rates on policy loans vary by company and policy type, typically ranging from 5% to 8%, though some policies have fixed rates set when you bought them. You can usually borrow up to 90% of your cash value, though some policies allow you to borrow the full amount. The loan process is usually faster than other ways to access cash — often just a phone call and a form.

The risk is that unpaid interest compounds. If you borrow $10,000 at 6% and never repay it, the debt grows each year. If the loan balance plus interest eventually exceeds your cash value, the policy can lapse and you lose the death benefit entirely. This happens most often when someone borrows early in the policy's life, when cash value is still small.

Withdrawals: taking cash out directly

You can withdraw money directly from your policy's cash value without borrowing. Unlike a loan, a withdrawal reduces your cash value permanently and lowers your death benefit. Withdrawals are tax-free up to the amount of premiums you've paid in; anything above that is taxed as ordinary income in the year you withdraw it.

If you've paid $50,000 in premiums over 15 years and your cash value is now $75,000, you can withdraw $50,000 tax-free. Any withdrawal above $50,000 triggers income tax on the excess. Your insurance company will issue a 1099-R form at tax time if you withdraw more than your basis (total premiums paid).

Withdrawals are usually processed within a week or two. There's no interest to repay, but the reduction in death benefit is permanent unless you pay premiums to rebuild it. Some policies charge a surrender charge if you withdraw during the first 10 to 15 years, though this fee typically decreases over time.

Surrendering the policy: cashing out completely

You can surrender your entire policy to the insurance company and receive its cash surrender value — the cash value minus any surrender charges and outstanding loans. This ends the policy and your coverage. The company sends you a check, usually within two to four weeks.

The tax treatment is the same as a withdrawal: you owe income tax only on the amount above your total premiums paid. If your cash value is $100,000 and you've paid $70,000 in premiums, you owe tax on $30,000. If your cash value is less than your premiums (which can happen if the policy performed poorly), you have no tax bill and may be able to claim a loss on your tax return.

Surrendering makes sense if you no longer need the death benefit, can't afford the premiums, or need a larger lump sum than a loan or withdrawal would provide. It does not make sense if you still want coverage — you'd need to buy a new policy, and you'll be older and possibly less healthy, so premiums will be higher.

Viatical and life settlements: selling your policy

A viatical settlement is the sale of your life insurance policy to a third party — usually an investment company — for a lump sum. You receive less than the full death benefit but more than the cash surrender value. The buyer becomes the policy owner, pays future premiums, and collects the death benefit when you die.

Viatical settlements were originally designed for terminally ill people who needed cash immediately. They're now available to anyone, though the amount you receive depends on your age, health, and life expectancy. A 75-year-old in poor health might receive 50% to 70% of the death benefit; a 60-year-old in good health might receive 40% to 60%.

The process takes four to eight weeks and involves a medical exam and detailed health questionnaire. You'll owe income tax on the proceeds above your cost basis (premiums paid). Some states regulate viatical settlements; others don't. Before pursuing this route, understand that the buyer will own your policy and you'll have no say in what happens to it.

Tax consequences of accessing your cash value

The tax treatment depends on which method you use. Policy loans are never taxed. Withdrawals and surrenders are taxed only on gains — the amount your cash value exceeds your total premiums paid. Viatical settlements are taxed on gains, though there are exceptions for terminally ill policyholders in some states.

Your insurance company will report withdrawals and surrenders on a 1099-R form if the gain exceeds $600. You report this on your tax return as ordinary income. If you're in a high tax bracket, the tax bill can be substantial. For example, a $30,000 withdrawal of gains at a 24% tax rate costs $7,200 in federal tax alone.

If you take a policy loan and die before repaying it, the unpaid balance is deducted from the death benefit, which reduces what your beneficiaries receive but does not create a tax bill for them. The loan itself is not taxable income to you.

How accessing cash affects your death benefit

Any money you take out — whether by loan, withdrawal, or surrender — reduces what your beneficiaries receive. A policy loan reduces the death benefit by the unpaid balance plus accrued interest. A withdrawal or surrender reduces it by the amount withdrawn. If you borrow $50,000 and die without repaying, your beneficiaries receive $50,000 less.

This is the core trade-off: you get money now, but your family gets less later. If you're borrowing to cover a temporary need, repaying the loan preserves the full death benefit. If you're withdrawing because you no longer need the coverage, the reduced benefit may not matter.

Some people use policy loans strategically — borrowing during a financial emergency and repaying over time. Others use withdrawals to reduce premiums on a policy they want to keep but can no longer afford. Understanding your own situation and your family's needs is essential before you decide.

Frequently Asked Questions

What's the difference between a policy loan and a withdrawal?

A policy loan must be repaid with interest, but it's not taxed as income. A withdrawal is not repaid, but you owe income tax on any gains above your premiums. Loans preserve your death benefit if you repay them; withdrawals reduce it permanently.

Can I access cash from a term life policy?

No. Term policies have no cash value and cannot be borrowed against or withdrawn from. Only permanent policies — whole life, universal life, and variable universal life — build cash value.

Will taking money out end my policy?

A loan or withdrawal keeps the policy in force as long as you pay premiums. A surrender ends the policy immediately. If you take a large loan and don't repay it, unpaid interest can eventually cause the policy to lapse.

How long does it take to get the money?

Policy loans are usually processed in one to two weeks. Withdrawals typically take two to four weeks. Surrenders take two to four weeks. Viatical settlements take four to eight weeks because they require medical underwriting.

What happens if I can't repay a policy loan?

You don't have to repay it. When you die, the unpaid balance plus interest is subtracted from the death benefit. If the loan balance grows larger than your cash value, the policy can lapse and you lose coverage.