You can cash out a life insurance policy in three main ways: surrender it 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 the policy active, and what your policy type allows. A cash surrender ends the policy permanently and pays you whatever cash value has accumulated, minus any surrender fees. A policy loan lets you borrow against the cash value while keeping coverage in place, though you'll owe interest. A life settlement means selling your policy to an investor for a lump sum — usually more than surrender value but less than the death benefit.
Not all policies have cash value. Term life insurance has no cash component and cannot be cashed out. Whole life, universal life, and variable universal life policies do accumulate cash value over time and can be accessed through one of these three routes.
Key Takeaways
- Surrendering a policy pays you its cash value immediately but ends coverage and may trigger surrender charges that reduce the payout.
- Policy loans let you borrow against cash value at a set interest rate while keeping the policy active, but unpaid loans reduce the death benefit.
- Life settlements sell your policy to a third party for more than surrender value, but the buyer becomes the new owner and beneficiary.
- Term life policies have no cash value and cannot be cashed out under any method.
- Cashing out a permanent policy may have tax consequences if the cash value exceeds what you paid in premiums.
Surrendering your policy for cash value
A cash surrender is the simplest route: you contact your insurance company, request surrender, and receive a check for the policy's cash value minus any surrender charges. The policy ends immediately, and you have no further coverage or premium obligations.
The catch is the surrender fee, which can be substantial in the first years of a whole life policy. A policy might have a cash value of $50,000 but a surrender charge of $8,000 to $12,000 if you cash it out in year five. The surrender period typically lasts 10 to 15 years, after which the fee drops or disappears. Check your policy document or call your insurer to find out when your surrender period ends and what the current charge would be.
Surrendering also means you lose the death benefit. If you have dependents or debts that would fall on your family, this is a permanent loss of that protection. Some people keep a smaller policy and surrender only the larger one to balance cash needs against remaining coverage.
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 coverage active, continue paying premiums, and the death benefit remains in place. The insurance company charges interest on the loan, typically ranging from 5% to 8% depending on the policy and current rates.
The loan amount is usually limited to 90% of your cash value, though some policies allow up to 100%. You don't have a fixed repayment schedule — you can pay back as much or as little as you want, whenever you want. However, any unpaid loan balance and accrued interest reduce the death benefit your beneficiaries receive. If you die with a $30,000 loan outstanding on a $100,000 policy, your beneficiaries get $70,000.
A policy loan makes sense if you need cash temporarily but want to keep coverage in place, or if you're in a low-income year and want to avoid surrendering. It's also useful if you're younger and the surrender charge is still high. The downside is that interest compounds over time, and if the loan grows large enough, it can eventually consume the entire cash value and cause the policy to lapse.
Selling your policy through a life settlement
A life settlement is a sale of your policy to a third-party investor who becomes the new owner and beneficiary. The investor pays you a lump sum — typically more than you'd get by surrendering but less than the death benefit — and takes over premium payments. When you die, the investor collects the death benefit.
Life settlements are most common for people over 65 with policies worth $100,000 or more who no longer need the coverage. The sale price depends on your age, health, life expectancy, and the policy's death benefit. A 75-year-old in declining health might receive 50% to 60% of the death benefit; a healthier 65-year-old might receive 20% to 30%.
The process takes two to four months. You'll need to undergo a medical evaluation, and the investor will review your medical records and prescription history. You'll also need to disclose any significant health changes since the policy was issued. Once the sale closes, you have no further involvement with the policy, and the investor handles all premium payments and claims.
Life settlements have tax implications: the proceeds above your cost basis (the premiums you paid) are taxable as ordinary income. A financial advisor or tax professional can help you understand the tax hit before you commit to a sale.
Understanding surrender charges and timing
Surrender charges exist to discourage early withdrawal and protect the insurance company's investment in underwriting and administration. They're highest in the first year and decline over time. A whole life policy might have a 10% surrender charge in year one, 9% in year two, and so on, reaching zero in year 11.
The surrender charge is deducted from your cash value before you receive payment. If your cash value is $40,000 and the surrender charge is $4,000, you receive $36,000. Some policies have no surrender charge if you've held them long enough or if you take a policy loan instead of surrendering.
Check your policy document for the surrender charge schedule, or call your insurer and ask for the current cash value and the surrender charge if you cashed out today. This information helps you decide whether to wait, take a loan, or explore a life settlement.
Tax consequences of cashing out
When you surrender a policy or receive proceeds from a life settlement, the amount above your cost basis is taxable as ordinary income. Your cost basis is the total premiums you paid into the policy over its lifetime.
For example, if you paid $60,000 in premiums and surrender the policy for $85,000, you owe income tax on the $25,000 gain. The tax is due in the year you receive the money. If you take a policy loan, there's no immediate tax, but if the loan eventually exceeds your cost basis, the excess becomes taxable income in that year.
Death benefits paid to beneficiaries are generally not taxable, which is one reason some people keep policies in place rather than cashing out. A tax professional can help you model the tax impact of each option before you decide.
Comparing your three options
| Method | How It Works | Payout Amount | Coverage Status | Timeline |
|---|---|---|---|---|
| Cash Surrender | End the policy and receive cash value | Cash value minus surrender charge | Coverage ends immediately | 1 to 2 weeks |
| Policy Loan | Borrow against cash value at interest | Up to 90% of cash value | Coverage stays active | 1 to 2 weeks |
| Life Settlement | Sell policy to investor for lump sum | 20% to 60% of death benefit | Investor becomes owner | 2 to 4 months |
Frequently Asked Questions
Can I cash out a term life insurance policy?
No. Term life policies have no cash value and cannot be cashed out, surrendered, or borrowed against. When the term ends, the policy simply expires. If you need money, your only option is to stop paying premiums and let the coverage lapse.
What happens if I take a policy loan and don't pay it back?
The unpaid loan balance and interest reduce your death benefit dollar-for-dollar. If the loan grows large enough to equal your cash value, the policy may lapse and coverage ends. You'll receive a notice before this happens, giving you time to pay down the loan or add funds.
Will cashing out my policy affect my taxes?
Yes, if the amount you receive exceeds the premiums you paid in. The excess is taxable as ordinary income in the year you receive it. Policy loans are not taxable unless the loan balance exceeds your cost basis. Consult a tax professional to understand your specific situation.
How long does it take to get money from a cash surrender?
Most insurance companies process cash surrenders within one to two weeks. You'll need to submit a written request and sign surrender paperwork. Some companies offer faster processing if you request it, though there may be a small fee.
Is a life settlement better than surrendering my policy?
A life settlement typically pays more than surrender value, but the process takes longer and involves medical underwriting. It also has tax consequences. A life settlement makes sense if you're older, in declining health, and the policy is large enough to attract investor interest. For smaller policies or younger people, surrender or a policy loan is usually simpler.