You can cash out a life insurance policy in three main ways: surrender it to the insurer for its cash value, take a loan against it, or sell it to a third party
The method you choose depends on how much money you need, whether you want to keep some coverage, and how quickly you need the funds. Surrendering the policy ends your coverage entirely but is the simplest route. A policy loan lets you borrow against the cash value while keeping the death benefit intact — though unpaid interest reduces what your beneficiaries receive. Selling the policy to a buyer (called a life settlement) can bring in more cash than surrender value, but the process takes longer and involves giving up all claims to the policy.
Not all policies have cash value. Term life insurance has no surrender value — if you stop paying premiums, the coverage simply ends and you get nothing back. Permanent policies like whole life, universal life, and variable universal life do build cash value over time, and that is what you can access.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life) have cash value you can access; term policies have no surrender value.
- Surrendering the policy to your insurer is fastest but typically pays less than a life settlement, and you lose all coverage immediately.
- A policy loan lets you borrow against your cash value without surrendering the policy, but unpaid interest reduces your death benefit.
- Life settlements can pay significantly more than surrender value but require finding a buyer and take several weeks to complete.
- Surrendering a policy may trigger income tax on gains above what you paid in premiums, depending on policy type and how long you held it.
Surrendering your policy for cash value
Surrendering means you tell your insurance company you want to end the policy and receive its cash value. This is the most straightforward option and usually takes one to two weeks. You contact your insurer, request a surrender, and they send you a check for the cash value minus any outstanding loans or unpaid premiums on the policy.
The cash value is not the same as what you paid in. It is the amount the insurer has set aside based on your policy type, how long you have held it, and current market conditions (for variable policies). In the early years of a permanent policy, cash value is low because the insurer deducts commissions and administrative costs. It grows over time, but you will rarely get back dollar-for-dollar what you contributed in premiums.
Once you surrender, your coverage ends completely. Your beneficiaries receive nothing if you die after the surrender is processed. This is the trade-off for getting cash quickly without involving a third party.
Taking a loan against your policy
A policy loan lets you borrow money using your cash value as collateral, without surrendering the policy. You keep your death benefit in place, and your beneficiaries still receive a payout when you die — but the amount is reduced by whatever you borrowed plus any unpaid interest.
Policy loans typically have a lower interest rate than personal loans or credit cards, often between 5 and 8 percent depending on the policy and insurer. You are not required to repay the loan on any set schedule; the debt simply sits against your policy. If you die before repaying it, the insurer deducts the loan balance and interest from the death benefit your beneficiaries receive.
This option works well if you need cash but want to preserve some coverage, or if you are not certain you want to end the policy permanently. The downside is that interest compounds over time, and if you never repay the loan, your death benefit shrinks. Some policies will lapse if the loan balance plus interest eventually exceeds the cash value.
Selling your policy in a life settlement
A life settlement is the sale of your policy to a third-party buyer — usually an investment company or group of investors. They take over the premium payments and become the beneficiary. When you die, they receive the death benefit. In return, you receive a lump sum payment, typically higher than what your insurer would pay in a surrender.
Life settlements make sense if your policy has significant cash value and you no longer need the coverage. The buyer pays based on your life expectancy, the policy's death benefit, and current premium costs. Someone in good health with a large death benefit will receive a higher offer than someone with health problems or a smaller benefit.
The process takes four to eight weeks. You work with a life settlement broker who shops your policy to multiple buyers and negotiates on your behalf. You will need to undergo a medical underwriting review, and the buyer will verify the policy details. Fees typically run 10 to 15 percent of the sale price, paid by the buyer, not you.
Life settlements have tax implications. The IRS taxes the difference between what you receive and what you paid in premiums as ordinary income. You also lose all control over the policy — the new owner decides whether to keep paying premiums, and you have no say in the death benefit.
Tax consequences of cashing out
How much tax you owe depends on the type of policy and how much you received. For most permanent policies, if you surrender for more than the total premiums you paid in, the gain is taxable as ordinary income. For example, if you paid $50,000 in premiums over 20 years and surrender for $75,000, the $25,000 gain is taxable income.
Modified endowment contracts (MECs) — policies that received too much premium too quickly — have stricter rules. Withdrawals from an MEC are taxed on a last-in-first-out basis, meaning gains come out first and are taxed before your basis (premiums paid). If you are under 59½, you also owe a 10 percent early withdrawal penalty on the taxable portion.
Policy loans are generally not taxable when you take them out, but if the loan balance exceeds your cost basis, the excess is taxable. If the policy lapses or is surrendered while a loan is outstanding, any unpaid interest becomes taxable at that time.
Consult a tax professional before cashing out, especially if the policy has been in force for many years or you have taken previous loans. The tax bill can be substantial and may affect your overall tax situation for the year.
Comparing the three options side by side
| Method | Time to receive funds | Typical payout | Coverage after | Tax treatment |
|---|---|---|---|---|
| Surrender | 1–2 weeks | Cash value (lowest) | None — policy ends | Gain above premiums paid is taxable |
| Policy loan | 1–2 weeks | Borrow up to cash value | Full coverage (reduced by loan + interest at death) | Generally not taxable unless loan exceeds basis |
| Life settlement | 4–8 weeks | Cash value (often higher) | None — policy sold | Gain above premiums paid is taxable |
What to do before you cash out
Before you surrender, borrow against, or sell your policy, review what you are giving up. If you still need life insurance, cashing out means your beneficiaries lose that protection. Consider whether you could reduce the death benefit instead of ending the policy entirely, or whether a policy loan would meet your short-term need without permanent loss of coverage.
Get a written statement from your insurer showing the current cash value, any outstanding loans, and surrender charges (some policies deduct a fee for early surrender). Ask about the policy's loan provisions — interest rate, repayment terms, and what happens if the loan balance grows. If you are considering a life settlement, contact a licensed broker to get quotes from multiple buyers before deciding.
If the policy is part of an estate plan or trust, check whether cashing it out affects your beneficiaries or your overall plan. Some policies are owned by trusts specifically to keep the death benefit out of your taxable estate, and surrendering could change that structure.
Frequently Asked Questions
Can I cash out a term life insurance policy?
No. Term policies have no cash value. When you stop paying premiums, the coverage ends and you receive nothing. Only permanent policies (whole life, universal life, variable universal life) build cash value that you can access.
What happens if I take a policy loan and never repay it?
The unpaid loan balance and accrued interest remain against your policy. When you die, your beneficiaries receive the death benefit minus what you owe. If the loan balance plus interest eventually exceeds your cash value, the policy may lapse and coverage ends.
Will I owe taxes if I take a policy loan?
Usually not when you take the loan. However, if the loan balance exceeds the total premiums you paid in (your cost basis), the excess is taxable. If the policy lapses or is surrendered with an outstanding loan, any unpaid interest becomes taxable at that time.
How much will I get if I sell my policy in a life settlement?
Life settlement offers vary widely based on your age, health, the death benefit amount, and current premium costs. You typically receive more than surrender value but less than the full death benefit. A broker can shop your policy to multiple buyers to find the best offer.
Can I cash out part of my policy without ending it?
Yes, through a policy loan. You borrow against your cash value and keep the policy in force. Some insurers also allow partial surrenders where you reduce the death benefit and receive a portion of the cash value, keeping the rest of the policy active.