You can access cash from a permanent life insurance policy while you're alive through several methods
Most life insurance policies are designed to pay out after death, but certain types of permanent policies — whole life, universal life, and variable universal life — build cash value over time that you can tap into while living. The three main ways to access this money are a policy loan, a withdrawal, or a surrender. Each method works differently, costs different amounts, and affects what your beneficiaries receive.
Term life insurance, the most common type, has no cash value and cannot be borrowed against. If you own a term policy, you cannot use this strategy. But if you own or are considering a permanent policy, understanding these options now can help you make better decisions about whether that policy makes sense for your situation.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) build cash value that you can access while alive; term policies have no cash value.
- A policy loan lets you borrow against your cash value at a set interest rate, and unpaid loans reduce what your beneficiaries receive.
- A withdrawal takes cash value out permanently, reduces your death benefit dollar-for-dollar, and may trigger taxes if you withdraw more than you paid in premiums.
- Surrendering the policy ends it entirely and gives you the remaining cash value minus any surrender charges, which can be steep in the first years.
- Some policies offer a living benefit rider that lets you access money for specific events like terminal illness, critical illness, or long-term care without borrowing.
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 do not have to may have access to or explain why you need the money. The insurance company lends you the cash, and you pay interest on the loan at a rate set in your policy — typically between 5% and 8%, though it varies by insurer and policy type.
The loan does not have to be repaid on any set schedule. You can pay it back whenever you want, or not at all. However, any unpaid loan balance plus accrued interest is subtracted from your death benefit when you die. If the loan and interest grow larger than your cash value, the policy can lapse and terminate, leaving you without coverage and potentially triggering a tax bill.
Policy loans are popular because they are fast — often approved within days — and do not require a credit check. The borrowed money is also usually tax-free, as long as the policy has not been classified as a modified endowment contract (MEC), a tax status that changes the rules. If you are considering a loan, ask your insurance company whether your policy is an MEC before proceeding.
Withdrawals: taking cash value out permanently
A withdrawal removes cash value from your policy permanently. Unlike a loan, you do not repay it. The amount you withdraw is subtracted directly from your death benefit, so your beneficiaries receive less when you die.
Withdrawals are tax-free up to the amount of premiums you have paid into the policy. Any withdrawal above that threshold is taxed as ordinary income in the year you withdraw it. For example, if you paid $50,000 in premiums and your cash value is now $80,000, you can withdraw $50,000 tax-free, but withdrawing $80,000 means $30,000 is taxable income.
Withdrawals are simpler than loans because there is no interest to track and no risk of the policy lapsing due to unpaid loan debt. However, they are permanent — once you withdraw the money, that cash value is gone and no longer grows. Most insurance companies allow partial withdrawals, so you do not have to take out all your cash value at once.
Surrendering the policy: ending coverage to get cash
Surrendering a policy means canceling it entirely and receiving the remaining cash value as a lump sum. This is a permanent decision. Once surrendered, the policy ends and your beneficiaries receive nothing when you die — there is no death benefit to collect.
When you surrender, the insurance company deducts surrender charges from your cash value. These charges are highest in the first few years of the policy and decline over time. A policy might have a 10% surrender charge in year one, 8% in year two, and so on, eventually reaching zero after 10 or 15 years. The exact schedule is in your policy document.
Like withdrawals, the money you receive is tax-free up to the premiums you paid in. Anything above that is taxable income. Surrender is the right choice only if you no longer need or want the death benefit and are willing to give up coverage entirely.
Living benefit riders: accessing money for specific events
Some permanent policies include or allow you to add a living benefit rider — an optional add-on that lets you access your death benefit early if certain conditions occur. Common triggers include terminal illness (usually defined as a diagnosis giving you less than 12 months to live), critical illness (heart attack, stroke, cancer, organ transplant), or long-term care needs.
Living benefit riders work differently than loans or withdrawals. Instead of borrowing against cash value, you receive a portion of your actual death benefit early. The amount you receive is deducted from what your beneficiaries get. For example, if your death benefit is $500,000 and you access $100,000 through a living benefit rider for long-term care, your beneficiaries receive $400,000 when you die.
Living benefit riders typically cost extra when you buy the policy, though some policies include them at no additional charge. They are not available on all policies or with all insurers. If you think you might need access to your death benefit while alive, ask about living benefit riders when shopping for or reviewing your policy.
Tax consequences of accessing your cash value
The tax treatment depends on which method you use and how much you take out. Policy loans are generally tax-free because you are borrowing, not withdrawing. Withdrawals and surrenders are tax-free up to your basis — the total premiums you have paid — and taxed as ordinary income on anything above that.
If your policy is classified as a modified endowment contract (MEC), the tax rules change. With an MEC, loans and withdrawals are taxed differently: withdrawals are taxed on a last-in-first-out basis, meaning gains come out first and are taxed before your basis. Additionally, withdrawals from an MEC before age 59½ may be subject to a 10% penalty tax on top of ordinary income tax.
A policy becomes an MEC if you pay too much into it too quickly relative to the death benefit. This is rare with policies purchased normally, but it can happen if you make large lump-sum payments or add money to an existing policy. Ask your insurance company whether your policy is an MEC before making any withdrawals or loans.
Comparing the three methods side by side
| Method | Repayment Required | Impact on Death Benefit | Tax Treatment | Speed |
|---|---|---|---|---|
| Policy Loan | No set schedule; optional | Reduced by unpaid loan + interest | Tax-free (unless MEC) | Days to weeks |
| Withdrawal | No | Reduced dollar-for-dollar | Tax-free up to premiums paid; taxable above | Days to weeks |
| Surrender | No | Policy ends; no benefit | Tax-free up to premiums paid; taxable above | Weeks |
| Living Benefit Rider | No | Reduced by amount accessed | Varies; typically tax-free | Weeks to months |
When accessing your policy makes sense
Accessing your life insurance while alive makes sense when you have a genuine financial need and the policy is no longer serving its original purpose. Common scenarios include paying for long-term care, covering a major medical expense not covered by insurance, or funding a business opportunity when you no longer have dependents relying on the death benefit.
It makes less sense if you still have dependents who would suffer financially from your death, or if you are considering it just to avoid selling other assets. Borrowing against the policy can also backfire if you cannot repay the loan and it grows large enough to cause the policy to lapse, leaving you without coverage and potentially triggering unexpected taxes.
Before accessing your policy, talk to a tax professional about the specific tax consequences for your situation. Also review your policy document or call your insurance company to confirm the exact terms, surrender charges, and whether your policy is an MEC. These details vary widely and affect how much money you actually receive.
Frequently Asked Questions
Can I borrow from my term life insurance policy?
No. Term life insurance has no cash value, so there is nothing to borrow against. Only permanent policies — whole life, universal life, and variable universal life — build cash value and allow loans or withdrawals.
What happens if I take a policy loan and never repay it?
The unpaid loan balance plus accrued interest is subtracted from your death benefit when you die. If the loan and interest grow larger than your cash value, the policy can lapse and terminate, ending your coverage. You may also owe taxes on the lapsed amount. Contact your insurance company if you cannot repay a loan to discuss options.
Will withdrawing from my policy affect my taxes?
Withdrawals are tax-free up to the total premiums you paid in. Anything above that is taxed as ordinary income in the year you withdraw it. If your policy is a modified endowment contract (MEC), the rules are stricter and withdrawals before age 59½ may face a 10% penalty. Consult a tax professional for your specific situation.
Is a policy loan better than a withdrawal?
A policy loan is better if you plan to repay the money, because your death benefit stays intact (minus the unpaid loan). A withdrawal is simpler if you do not plan to repay, because there is no interest to track. Both reduce what your beneficiaries receive, so the choice depends on your situation and whether you want the policy to remain in force.
Can I access my death benefit early if I have a terminal illness?
Yes, if your policy includes a living benefit rider for terminal illness. This rider lets you access a portion of your death benefit early if you receive a diagnosis of less than 12 months to live. Not all policies include this rider, so check your policy document or contact your insurance company to see if it is available.