Yes, you can take money out of your life insurance policy while you're alive, but the method depends on the type of policy you own
Most people think of life insurance as money that pays out after death. But certain policies build cash value over time, and that cash belongs to you. You can access it through loans, withdrawals, or by surrendering the policy entirely. The trade-off is that taking money out reduces the death benefit your beneficiaries will receive, and it may trigger taxes or surrender charges.
Term life insurance has no cash value, so there's nothing to withdraw. Permanent policies—whole life, universal life, and variable universal life—accumulate cash value that you can tap into while living. How much you can take and what it costs you depends on which policy you have and how long you've owned it.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) build cash value you can access; term policies have no cash component.
- Policy loans let you borrow against your cash value at a set interest rate, and the loan doesn't count as income for tax purposes.
- Withdrawals come out tax-free up to the amount you've paid in premiums, but withdrawals above that are taxed as ordinary income.
- Surrendering your policy gives you all remaining cash value but ends your coverage and may trigger a tax bill if the cash value exceeds your total premiums paid.
- Taking money out reduces the death benefit, so your beneficiaries receive less when you die.
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 loan amount is subtracted from the death benefit. The interest rate is set in your policy contract and is usually lower than a bank loan or credit card.
The loan itself is not taxed as income, which is a major advantage over withdrawals. You can use the money for any reason: medical bills, home repairs, business needs, or everyday expenses. The insurance company doesn't ask what you need it for.
The downside is that unpaid interest compounds. If you take out a loan and never repay it, the interest keeps growing and eating into both your cash value and your death benefit. If the loan balance plus interest eventually exceeds your cash value, the policy can lapse and you'll lose coverage.
Withdrawals: taking cash value directly
You can withdraw money directly from your cash value without taking out a loan. Withdrawals are simpler than loans because there's no repayment obligation and no interest accrual. However, the tax treatment is different.
Withdrawals are tax-free up to the amount of premiums you've paid into the policy. Once you withdraw more than your total premiums, the excess is taxed as ordinary income at your regular tax rate. For example, if you've paid $50,000 in premiums and your cash value is $75,000, you can withdraw $50,000 tax-free, but the next $25,000 is taxable.
Like loans, withdrawals reduce your death benefit dollar-for-dollar. They also permanently reduce your cash value, so you can't rebuild it by paying more premiums. Some policies charge a surrender charge if you withdraw during the early years of ownership.
Surrendering your policy: cashing out completely
Surrendering means you give up the policy entirely and receive all remaining cash value. This ends your life insurance coverage. You receive a lump sum, usually within a few weeks.
The cash value you receive is tax-free up to your total premiums paid. Any amount above that is taxed as ordinary income. If you've owned the policy for many years and it has grown significantly, the tax bill can be substantial.
Surrender is the right choice only if you no longer need life insurance or can't afford the premiums. Once you surrender, you can't get the policy back. If you later want coverage, you'll have to apply for a new policy, and your age and health at that time will determine the cost.
How cash value grows and what affects how much you can take
Cash value grows through two mechanisms: premium payments and investment returns. With whole life insurance, the insurance company invests your premiums and credits a may provide minimum return to your cash value each year. With universal life and variable universal life, your cash value is tied to market performance or a money market account, so growth varies.
The longer you own the policy, the more cash value accumulates. In the first few years, cash value is usually small because most of your premium goes to insurance costs and company expenses. By year 10 or 15, cash value typically becomes substantial.
Your policy contract shows the surrender value (the cash value minus any surrender charges) at each policy year. This is the amount you'd receive if you surrendered today. The amount you can borrow is usually slightly less than the surrender value because the insurance company holds back a small reserve.
Tax consequences of taking money out
The tax treatment depends on whether you take a loan or a withdrawal. Policy loans are never taxed, even if you never repay them. The interest you pay on the loan is not deductible.
Withdrawals and surrenders are taxed on the gain—the amount by which your cash value exceeds your cost basis (total premiums paid). If your policy has a gain, you owe income tax on that gain at your ordinary tax rate, which could be 22%, 24%, 32%, 35%, or 37% depending on your income.
If you surrender a policy at a loss (cash value less than premiums paid), you cannot deduct the loss. You simply receive the cash value tax-free and that's the end of it.
What happens to your death benefit
Every dollar you take out—whether by loan, withdrawal, or surrender—reduces what your beneficiaries receive. If you have a $500,000 policy and you borrow $100,000, your death benefit is reduced to $400,000 (assuming the loan is unpaid at death).
This is the central trade-off of accessing your cash value. You're choosing between money now and money for your beneficiaries later. If you have dependents who rely on your life insurance, taking out large amounts can leave them underprotected.
If you take out a loan and then die before repaying it, the insurance company subtracts the loan balance plus accrued interest from the death benefit. Your beneficiaries receive the remainder.
Alternatives to taking money out of your policy
Before you access your cash value, consider whether other options might work better. A personal loan or home equity line of credit might have a lower interest rate than a policy loan and won't reduce your death benefit. A credit card advance or bank loan keeps your life insurance intact.
If you need cash and no longer need the full death benefit, you might sell your policy to a third party through a life settlement. A life settlement company pays you a lump sum (usually more than the surrender value but less than the death benefit) and becomes the new owner. This is only an option if you're older or have a serious health condition.
If you can't afford your premiums, you might reduce the death benefit instead of surrendering. Many policies let you lower your coverage to keep the policy in force at a lower cost, preserving some death benefit for your beneficiaries.
Frequently Asked Questions
Can I take money out of a term life insurance policy?
No. Term life insurance has no cash value component. It's pure insurance—you pay a premium for a set period, and if you die during that term, your beneficiaries receive the death benefit. When the term ends, the policy expires and you receive nothing. If you need to access cash, you would need a permanent policy like whole life or universal life.
Will taking a policy loan affect my credit score?
No. A policy loan is not reported to credit bureaus and does not appear on your credit report. It doesn't count as debt and won't affect your credit score or your ability to borrow from banks. The insurance company is lending you your own money, not extending credit in the traditional sense.
What happens if I take out a loan and die before repaying it?
The insurance company subtracts the unpaid loan balance plus any accrued interest from your death benefit. Your beneficiaries receive the remainder. For example, if your death benefit is $500,000 and you have an unpaid loan of $100,000 plus $5,000 in interest, your beneficiaries receive $395,000.
Can I take money out of my policy if I'm behind on premiums?
It depends on your policy. Some policies allow withdrawals or loans even if you're behind, and the withdrawal can be used to pay the overdue premiums. Others require your policy to be in good standing. Check your policy document or call your insurance company to find out what's allowed.
Is there a limit to how much I can borrow or withdraw?
Yes. You can borrow or withdraw up to your cash value (or slightly less, depending on your policy). You cannot access more than the cash value that has accumulated. If your policy has a surrender charge, the amount you can access may be reduced by that charge.