Yes, you can use life insurance while you're alive through features called living benefits

Most life insurance policies sit dormant until death, but several types let you tap the money or borrow against it while you're still living. The most common ways are cash value withdrawal, policy loans, accelerated death benefits, and surrendering the policy. Which option works depends on your policy type, how much cash value it has built up, and what you need the money for.

Term life insurance — the cheapest type — has no living benefits because it has no cash value. Whole life, universal life, and variable universal life policies all build cash value over time, and that's what you can access. The trade-off is that taking money out reduces the death benefit your beneficiaries receive, and it may trigger taxes or surrender charges.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life) build cash value you can access while alive; term life has no living benefits.
  • A policy loan lets you borrow against your cash value at a set interest rate without triggering immediate taxes, but unpaid loans reduce your death benefit.
  • Withdrawals from cash value are tax-free up to the amount you paid in premiums, but withdrawals above that are taxed as income.
  • Accelerated death benefits let you receive a portion of your death benefit now if you're terminally ill, chronically ill, or in a nursing home.
  • Surrendering your policy ends it permanently and gives you the cash value minus surrender charges, which can be steep in early years.

Policy loans: borrowing against your cash value

A policy loan is the most common way to access your money while keeping your policy active. You borrow against the cash value your premiums have built up, and the insurance company charges you interest — typically 5% to 8% depending on the policy and current rates. The loan doesn't count as income, so there's no immediate tax bill.

The catch is that any unpaid loan balance reduces your death benefit dollar-for-dollar. If your policy is worth $100,000 and you borrow $20,000 but never repay it, your beneficiaries receive $80,000. Interest accrues on the unpaid balance, so the debt grows over time. If the loan balance plus interest ever exceeds your cash value, the policy can lapse and be cancelled.

You can repay the loan on your own schedule — there's no fixed repayment term. Some people repay it within a few years; others never do. The insurance company doesn't report the loan to credit bureaus, so it won't affect your credit score.

Withdrawals from cash value

You can withdraw money directly from your cash value without borrowing. Unlike a loan, you don't pay interest and you don't have to repay anything. But withdrawals are permanent — that money is gone from your policy.

The tax treatment depends on how much you withdraw. Money you withdraw up to the total premiums you've paid in is tax-free. Anything above that is taxed as ordinary income. If you've paid $50,000 in premiums over 20 years and your cash value is now $80,000, you can withdraw $50,000 tax-free, but a $30,000 withdrawal would be taxed on the $30,000 above your basis.

Large withdrawals can trigger surrender charges — penalties the insurance company imposes if you take out too much too soon. These charges are steepest in the first 5 to 10 years of the policy and decline over time. Some policies have no surrender charge after 10 or 15 years. Check your policy documents to see what applies to yours.

Accelerated death benefits for illness or long-term care

If you're diagnosed with a terminal illness, chronic illness, or you're in a nursing home or hospice, you may be able to receive a portion of your death benefit now through an accelerated death benefit rider. This is sometimes called a "living benefit" or "terminal illness rider." Many policies include this at no extra cost; others charge a small fee.

The amount you can receive varies by policy — some let you access 25% to 50% of the death benefit, others up to 100%. You'll need medical documentation of your condition, and the insurance company will review it. Once approved, you receive a lump sum, and your death benefit is reduced by that amount.

Accelerated benefits are usually tax-free if you're terminally ill (expected to live less than 24 months) under federal law. Chronic illness benefits may be taxable depending on your situation and the policy terms. Ask your insurance company whether your specific benefit would be taxable before you request it.

Surrendering your policy for cash value

You can end your policy and receive its cash value in a lump sum. This is called surrendering the policy. The insurance company will subtract any outstanding loans, unpaid premiums, and surrender charges from the cash value before sending you the check.

Surrender charges can be substantial, especially early on. A policy might charge 7% to 10% of the cash value if you surrender in year 2, declining to 0% by year 15. On a $50,000 cash value in year 3, a 7% charge means you lose $3,500. After you surrender, your policy is gone — you have no death benefit and no coverage.

The tax treatment is the same as a withdrawal: you owe income tax on any cash value above the premiums you paid in. If you surrender a policy with $100,000 cash value and you paid $60,000 in premiums, you owe tax on $40,000 of gain.

When each option makes sense

A policy loan works best if you need money temporarily and plan to repay it, or if you want to keep your death benefit intact. You pay interest, but there's no tax bill and no surrender charges. This is the gentlest way to tap your policy.

A withdrawal makes sense if you need the money permanently and you're comfortable with a smaller death benefit. You avoid interest and repayment, but you lose that cash value forever and may face surrender charges.

Accelerated benefits are designed for people facing serious illness or long-term care costs. They let you use your own death benefit to pay for care now instead of leaving it to beneficiaries later.

Surrendering the policy is a last resort — use it only if you no longer need any life insurance and you're willing to pay surrender charges and potential taxes to access all remaining cash value at once.

What happens to your death benefit

Any money you take from your policy — whether through loans, withdrawals, or accelerated benefits — reduces what your beneficiaries receive. If you have a $250,000 death benefit and you borrow $50,000, your beneficiaries get $200,000 when you die (assuming you don't repay the loan).

This matters if life insurance is part of your family's financial plan. Before you access your policy, think about whether your beneficiaries still have enough coverage for their needs. You may want to buy additional term insurance to replace what you're borrowing or withdrawing.

Frequently Asked Questions

Can I borrow from my life insurance if I have term life?

No. Term life insurance has no cash value, so there's nothing to borrow against or withdraw. Only permanent policies like whole life and universal life build cash value. If you need money and have term life, you'd have to surrender it, but you'd receive nothing because term policies have no cash surrender value.

Will taking a loan from my policy affect my credit?

No. Policy loans don't appear on your credit report and don't affect your credit score. The insurance company doesn't report them to credit bureaus. However, if the loan balance grows and eventually causes your policy to lapse, you could lose your life insurance coverage.

What happens if I die with an unpaid policy loan?

Your death benefit is reduced by the unpaid loan balance plus any accrued interest. If you borrowed $30,000 and it grew to $35,000 with interest, your beneficiaries receive $35,000 less than the stated death benefit. The remaining amount is paid to your beneficiaries as normal.

Can I withdraw money from my life insurance without paying taxes?

Withdrawals up to the total premiums you've paid are tax-free. Anything above that is taxed as ordinary income at your regular tax rate. For example, if you paid $40,000 in premiums and your cash value is $70,000, you can withdraw $40,000 tax-free, but a $30,000 withdrawal would be taxed on the $30,000 gain.

Is there a penalty for taking money out early?

Surrender charges apply if you withdraw large amounts or surrender the policy within the first 10 to 15 years, depending on your policy. Policy loans typically don't have early withdrawal penalties, but you pay interest. Withdrawals may also trigger taxes on gains above your premium basis.