You can access cash from a life insurance policy in several ways, depending on the type of policy you own and your financial situation
Most life insurance policies fall into two categories: term life insurance, which pays a death benefit only, and permanent life insurance (whole life, universal life, or variable universal life), which builds cash value over time. If you own term life, you cannot access cash — the policy has no value until a death claim. If you own permanent life insurance, you have options to get money out while you are still alive.
The three main ways to access cash are taking a policy loan, surrendering the policy for its cash surrender value, or using a life settlement if you are older or ill. Each method has different costs, tax consequences, and effects on your death benefit. Understanding the differences helps you choose the option that fits your situation without accidentally destroying coverage you may still need.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life) build cash value; term life policies cannot be cashed out.
- A policy loan lets you borrow against your cash value at a set interest rate and keep your death benefit intact if you repay it.
- Surrendering your policy gives you the full cash surrender value but ends your coverage permanently and may trigger income taxes.
- A life settlement sells your policy to a third party for more than surrender value but less than the death benefit, and is only an option if you are older or have a serious illness.
- Unpaid policy loans reduce your death benefit and can cause the policy to lapse if interest and loans exceed the cash value.
Policy loans: borrowing against your cash value
A policy loan lets you borrow money from your insurance company using your policy's cash value as collateral. You keep the policy in force, your death benefit stays active, and you repay the loan with interest over time — or not at all, in which case the unpaid balance is subtracted from what your beneficiaries receive.
The interest rate is set in your policy contract and typically ranges from 5% to 8%, though some older policies have lower rates. You can borrow up to 90% of your cash value in most cases, though some policies allow you to borrow the full amount. The insurance company does not check your credit or employment — they are lending against money that is already yours.
The main advantage is flexibility: you can take the loan, repay it on your own schedule, and your death benefit remains available. The main risk is that if you do not repay the loan, the unpaid balance grows with interest and reduces what your beneficiaries get. If the loan balance plus interest ever exceeds your cash value, the policy can lapse and you lose coverage entirely.
Surrendering your policy for cash value
When you surrender a policy, you tell your insurance company you want to end it and receive the cash surrender value — the cash value minus any surrender charges. Surrender charges are fees the insurance company deducts if you cash out early; they are highest in the first few years and decline over time. After 10 to 15 years, many policies have little or no surrender charge.
Surrendering gives you access to the full remaining cash value in one lump sum, but it ends your coverage permanently. Your death benefit disappears. If you later decide you need life insurance again, you will have to apply for a new policy, which means a new medical exam and likely higher premiums because you are older.
Surrendering can also trigger income taxes. If your cash surrender value is higher than the total premiums you paid into the policy, the difference is taxable as ordinary income in the year you surrender. Your insurance company will send you a Form 1099-R showing the taxable amount, and you report it on your tax return. Consult a tax professional before surrendering a policy with significant cash value.
Life settlements: selling your policy to a buyer
A life settlement is a sale of your policy to a third-party buyer — usually an investment company or another individual. The buyer becomes the new owner, pays the remaining premiums, and receives the death benefit when you die. You receive a lump sum payment, which is typically more than your cash surrender value but less than the death benefit.
Life settlements are only available if you meet certain conditions. Most buyers require you to be at least 65 years old, though some work with younger people who have a serious illness or terminal diagnosis. Your policy must have a death benefit of at least $100,000 to $250,000 (the threshold varies by buyer). The policy must be permanent life insurance — term policies cannot be settled.
The settlement process takes several months. A broker finds buyers, collects offers, and you choose which one to accept. You will need to undergo medical underwriting so the buyer can assess your life expectancy. Proceeds from a life settlement may be taxable, and the rules are complex — a tax professional should review your situation before you proceed.
Comparing the three methods side by side
| Method | How Much You Get | Keep Your Coverage? | Tax Consequences | Timeline |
|---|---|---|---|---|
| Policy Loan | Up to 90% of cash value | Yes, if you repay | None, unless unpaid loan reduces death benefit | Days to weeks |
| Surrender | Full cash value minus surrender charges | No — coverage ends | Taxable if cash value exceeds premiums paid | Weeks |
| Life Settlement | More than surrender value, less than death benefit | No — buyer owns policy | May be taxable depending on your basis | 2 to 4 months |
What happens to your death benefit in each scenario
If you take a policy loan and repay it, your death benefit stays the same. If you do not repay it, your beneficiaries receive the death benefit minus the unpaid loan balance and accrued interest. Over time, an unpaid loan can grow large enough to consume most or all of the death benefit.
If you surrender your policy, there is no death benefit. The coverage is gone. Your beneficiaries receive nothing from the insurance company when you die — they only receive the cash you gave them while you were alive.
If you enter a life settlement, the new owner receives the full death benefit when you die. Your beneficiaries receive nothing from the insurance company, only the settlement payment you received upfront.
Costs and fees to watch for
Policy loans charge interest, which accrues whether you pay it back or not. The interest rate is in your contract and does not change. Some policies also charge an annual loan fee, typically $25 to $50 per year.
Surrendering a policy may include surrender charges, which decline over time. A policy surrendered in year 3 might have a 7% surrender charge; in year 10, it might be 1%; after year 15, it might be zero. Your policy statement shows the current surrender charge. You also pay income tax on gains above your basis (total premiums paid).
Life settlements involve broker fees, typically 10% to 15% of the settlement amount, though some brokers charge flat fees. Medical underwriting costs are usually paid by the buyer. You may also owe income tax on part of the proceeds, depending on how much of your basis you recover.
How to request a policy loan or surrender
Contact your insurance company directly — the phone number is on your policy statement or the company's website. Ask to speak with a policy services representative. They will ask which option you want (loan or surrender), verify your identity, and explain the exact amount you will receive.
For a policy loan, the company will ask how much you want to borrow and confirm the interest rate. They will send you loan documents to sign. The money typically arrives in your bank account within one to two weeks.
For a surrender, the company will calculate your cash surrender value (cash value minus any surrender charges), explain any tax consequences, and send you a surrender form to sign. Once signed and returned, the check usually arrives within two to four weeks. Ask the company to send you a Form 1099-R for tax purposes.
Before you contact your company, request a current policy statement if you do not have one. It shows your cash value, any surrender charges, and the current loan interest rate. This information helps you decide which option makes sense for your situation.
Frequently Asked Questions
What if I have a term life policy — can I cash it out?
No. Term life insurance has no cash value and cannot be cashed out. You can only stop paying premiums and let it expire, or convert it to permanent insurance if your policy includes a conversion option. Check your policy documents or call your insurance company to see if conversion is available.
Will taking a policy loan affect my credit score?
No. A policy loan does not appear on your credit report because the insurance company is not checking your credit — they are lending against your own money. It will not affect your credit score or your ability to borrow elsewhere.
Can I take a policy loan if I still owe money on the policy?
Yes. You can borrow against your cash value even if you are still making premium payments. The loan is separate from your premiums. However, if you do not repay the loan, the unpaid balance will reduce your death benefit and could eventually cause the policy to lapse if the loan grows too large.
How do I know if a life settlement is worth it?
Compare the settlement offer to your cash surrender value and to the death benefit. If you need money now and do not expect to live much longer, a settlement may pay more than surrender. If you are healthy and expect to live many more years, the death benefit your beneficiaries would receive is likely much higher than any settlement offer. A financial advisor or tax professional can help you weigh the trade-offs.
What happens to my policy if I take a loan and then stop paying premiums?
Your policy will lapse when you stop paying premiums, unless your cash value is large enough to cover the premiums automatically. If you have an unpaid loan, the loan balance will be deducted from your cash value. Once the policy lapses, your coverage ends and you cannot borrow more money against it.