You can access cash from a life insurance policy while you're still alive through a surrender, loan, or withdrawal — but each option costs you differently and affects your death benefit.
A life insurance policy surrender means you give up the policy entirely and receive its cash surrender value — the amount the insurance company will pay you right now. A policy loan lets you borrow against the cash value and keep the policy in force; you pay interest and the loan reduces what your beneficiaries receive. A withdrawal lets you take out part of the cash value without surrendering the whole policy, though it may trigger taxes and reduce your death benefit.
Which option makes sense depends on why you need the money, whether you still want life insurance coverage, and how much cash your policy has built up. Not all policies have cash value — term life insurance typically does not. Whole life, universal life, and variable universal life policies do accumulate cash value over time.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life) build cash value; term life policies have no cash to access.
- Surrendering your policy gives you the full cash value but ends your coverage permanently and may trigger income taxes on gains above what you paid in premiums.
- A policy loan lets you keep your coverage but costs interest, and any unpaid loan balance reduces the death benefit your beneficiaries receive.
- Withdrawals let you take part of the cash value without surrendering the policy, but amounts over your basis (premiums paid) are taxable as income.
- Your insurance company's surrender value is typically lower than the cash value because of surrender charges, especially in the first 10 years.
Understanding cash value and surrender value
Cash value is the amount your permanent life insurance policy has accumulated over time. It grows tax-deferred as long as the policy stays in force. The insurance company invests the premiums you pay, and a portion of those returns builds your cash value. The longer you hold the policy and the more you pay in premiums, the larger the cash value grows.
Surrender value is what the insurance company will actually pay you if you cash in the policy today. It is almost always lower than the cash value because the company deducts surrender charges — a penalty for ending the policy early. These charges are highest in the first few years (sometimes 10 percent or more of the cash value) and decline over time. After 10 to 15 years, surrender charges often disappear entirely. Your policy documents spell out the surrender charge schedule.
Before you contact your insurance company, request a policy illustration or in-force illustration. This document shows your current cash value, the surrender value after charges, and what happens to your death benefit under each option. It is free and takes a few days to arrive.
Surrendering the policy for a lump sum
Surrendering means you terminate the policy and receive the surrender value as a single payment, usually within 10 to 30 days. You lose all coverage — your beneficiaries receive nothing when you die. This option makes sense only if you no longer need life insurance or cannot afford the premiums.
The tax consequence depends on whether you have a gain. If your surrender value is higher than the total premiums you paid into the policy, the difference is taxable income in the year you surrender. For example, if you paid $50,000 in premiums over 20 years and the surrender value is $65,000, you owe income tax on the $15,000 gain. If the surrender value is less than your premiums (which can happen early in the policy's life), there is no tax.
Contact your insurance company's customer service line and ask to surrender the policy. They will send you a form to sign and explain the exact amount you will receive after surrender charges. Some companies allow you to surrender online; others require a mailed form. Once the company receives your signed request, the clock starts on the payment timeline.
Taking a loan against the cash value
A policy loan lets you borrow money using your cash value as collateral. You keep the policy in force, your death benefit stays active, and you do not owe income tax on the loan itself — it is not income, it is borrowed money. However, you pay interest on the loan, typically 5 to 8 percent depending on the policy type and current rates, and any unpaid balance reduces what your beneficiaries receive.
The insurance company will lend you up to 90 percent of your cash value, sometimes more. You can repay the loan on your own schedule or let it sit; there is no fixed repayment term. If you die before repaying, the company deducts the loan balance plus accrued interest from your death benefit. If the loan balance exceeds your cash value, the policy can lapse and your coverage ends.
To take a policy loan, call your insurance company and request a loan application. They will tell you the maximum you can borrow, the interest rate, and the repayment terms. The money typically arrives within one to two weeks. You will receive a loan statement showing the balance and interest accruing each month.
Withdrawing part of the cash value
A withdrawal lets you take out a portion of your cash value without surrendering the entire policy. Your coverage continues, but the death benefit is reduced by the amount you withdraw. Unlike a loan, you do not repay a withdrawal — it is gone.
Withdrawals are taxed differently than loans. The first dollars you withdraw are treated as a return of your premiums (your basis) and are not taxed. Once you have withdrawn an amount equal to what you paid in premiums, any additional withdrawals are taxed as ordinary income. For example, if you paid $40,000 in premiums and withdraw $50,000 total, the first $40,000 is tax-free and the last $10,000 is taxable income.
Withdrawals also reduce your cash value, which means less money available for future loans or withdrawals and slower growth going forward. Some policies charge a withdrawal fee, typically $25 to $50 per withdrawal. Contact your insurance company to request a withdrawal, and they will explain how much is tax-free based on your premium history.
Comparing the three options side by side
| Option | Coverage After | Tax on Gains | Timeline | Best For |
|---|---|---|---|---|
| Surrender | None — policy ends | Yes, on amount above premiums paid | 10–30 days | No longer need insurance |
| Policy Loan | Full coverage continues | No tax on loan itself; interest accrues | 1–2 weeks | Need cash but want to keep coverage |
| Withdrawal | Reduced by withdrawal amount | Yes, on amount above premiums paid | 1–2 weeks | Need some cash, want to keep some coverage |
What happens if you need the money urgently
If you need cash quickly, a policy loan is usually the fastest route. Most insurance companies process loans within one to two weeks, and some offer expedited processing for an extra fee. You avoid the tax hit of a withdrawal or surrender, and your coverage stays in place.
If you have already decided you do not need the insurance anymore, surrender is faster than waiting for a loan to be approved and repaid. The trade-off is the tax bill on any gains and the loss of coverage. If you are unsure whether you need the insurance, a loan buys you time to decide without losing the policy.
Before you contact your insurance company, know your reason for needing the money. If it is a temporary cash shortage, a loan makes sense. If you are downsizing coverage because your needs have changed, a withdrawal or surrender may be better. If you are facing a major life change — retirement, health issues, or a shift in financial priorities — talk to a financial advisor or tax professional first. They can model the tax consequences and help you decide which option costs you least.
Frequently Asked Questions
Will I owe taxes if I take a policy loan?
No. A policy loan is not income — it is borrowed money, so there is no immediate tax. However, interest accrues on the loan, and if the loan balance plus interest exceeds your cash value, the excess may be taxable. Consult a tax professional if your loan grows large.
What happens to my death benefit if I surrender the policy?
Your death benefit ends. Your beneficiaries receive nothing. The policy is terminated and you receive only the surrender value. This is why surrender makes sense only if you no longer need the insurance.
Can I take a withdrawal and keep the policy active?
Yes. A withdrawal reduces your cash value and your death benefit, but the policy stays in force. You can continue paying premiums and the remaining cash value continues to grow. A loan works similarly but requires repayment.
How long does it take to get money from a policy surrender?
Most insurance companies send the surrender payment within 10 to 30 days of receiving your signed request. Some expedite to 5 to 7 days if you ask. Call your company to confirm the timeline for your specific policy.
What if my cash value is very small?
If your cash value is less than the surrender charges, the surrender value could be zero or negative. In that case, you would owe the company money to surrender. A loan or withdrawal would not be possible. You would need to keep paying premiums or let the policy lapse.