How withdrawals work with life insurance
You can withdraw money from a life insurance policy only if it has a cash value — which means it is a permanent policy like whole life or universal life, not a term policy. Term life has no cash value to withdraw. When you take money out, the insurance company deducts it from your policy's cash value, and your death benefit shrinks by the same amount. The withdrawal itself is usually tax-free up to the amount you have paid in premiums, but anything beyond that counts as taxable income.
The process is straightforward: you contact your insurance company, request a withdrawal, and the money typically arrives within one to two weeks. There is no application or approval process — the money is yours to take. However, withdrawing reduces the protection your beneficiaries will receive, so this is a decision to make carefully.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can withdraw; term policies do not.
- Withdrawals are usually tax-free up to the amount of premiums you have paid, but withdrawals beyond that are taxable income.
- Your death benefit decreases by the amount you withdraw, permanently reducing what your beneficiaries receive.
- You can withdraw as much as you want up to your policy's cash value, but withdrawing the full amount will cancel the policy.
- Withdrawals take one to two weeks and do not require approval, but some policies charge a surrender fee if you withdraw within a certain period.
The difference between withdrawals and loans
A withdrawal takes money out of your policy permanently. A policy loan lets you borrow against your cash value and keep the policy intact — you pay back the loan with interest, and your death benefit stays the same. Withdrawals are simpler because there is no repayment obligation, but loans preserve your coverage.
If you need the money temporarily or want to keep your death benefit unchanged, a loan is often the better choice. If you need the money long-term and do not plan to repay it, a withdrawal makes more sense. Ask your insurance company which option costs less in your situation — loan interest rates and withdrawal tax consequences vary by policy type and your income.
Tax consequences of withdrawals
The IRS treats withdrawals in layers. Money you withdraw up to your cost basis — the total premiums you have paid — comes out tax-free. Anything beyond that is taxable as ordinary income in the year you withdraw it. For example, if you have paid $50,000 in premiums and your cash value is $75,000, you can withdraw $50,000 tax-free, but the next $25,000 counts as taxable income.
This tax treatment applies only to withdrawals, not to policy loans. If you borrow against your cash value instead, you owe no tax on the borrowed amount, though you do pay interest. When the policy eventually pays out as a death benefit, that money is tax-free to your beneficiaries regardless of withdrawals or loans you took during your lifetime.
If you are unsure whether a withdrawal will push you into a higher tax bracket or affect other tax situations, talk to a tax professional before you withdraw. The insurance company can tell you your cost basis and current cash value, which is what you need to calculate the tax impact.
Surrender fees and timing
Many permanent policies charge a surrender fee if you withdraw or cancel within a certain period — often the first 10 to 15 years. This fee is a percentage of the cash value you are withdrawing, and it can be substantial. A policy might have $50,000 in cash value but charge a 10% surrender fee, meaning you lose $5,000 to the fee.
Surrender fees decline over time and eventually disappear. Check your policy documents or call your insurance company to find out when your surrender period ends. If you are past that period, you can withdraw without penalty. If you are still in it, weigh the fee against your need for the money — sometimes it still makes sense to withdraw even with the fee, but not always.
Some policies allow you to withdraw a small amount each year without triggering the surrender fee. Ask your company whether that option exists in your policy.
What happens to your policy after withdrawal
A withdrawal reduces your death benefit dollar-for-dollar. If your policy has a $500,000 death benefit and you withdraw $50,000, your beneficiaries will receive $450,000 when you die. The policy stays active and continues to accrue cash value, but at a lower level.
If you withdraw your entire cash value, the policy cancels. You lose all coverage, and your beneficiaries receive nothing when you die. This is rarely the right move unless you have decided you no longer need life insurance at all.
Some policies have a minimum death benefit that the insurance company will not let you fall below. This means you cannot withdraw so much that your death benefit drops below that minimum. Check your policy documents to see if this applies to you.
How to request a withdrawal
Contact your insurance company directly — by phone, online portal, or mail. You will need your policy number. The company will ask how much you want to withdraw and how you want the money sent (usually check or direct deposit). They will confirm your cash value, calculate any surrender fees or tax consequences, and process the withdrawal.
Most companies send the money within one to two weeks. Some offer expedited processing for an additional fee. There is no underwriting or approval process — the money is yours to take as long as you have cash value available.
Before you call, gather your policy documents so you know your cost basis and whether you are still in the surrender period. Ask the company to explain any fees and the tax treatment of your specific withdrawal amount. Getting this in writing before you proceed protects you from surprises.
Alternatives to withdrawals
If you need cash but want to keep your coverage, a policy loan is the most direct alternative. You can also explore selling your policy to a third party through a life settlement, though this requires the policy to be at least 10 years old and you to be in declining health — it is not an option for most people.
If you have a term policy with no cash value, you cannot withdraw anything, but you can stop paying premiums and let it lapse. You lose coverage but owe nothing more. Some term policies can be converted to permanent policies, which would then build cash value over time.
Before withdrawing, ask yourself whether you truly need the money or whether you are considering it because you cannot afford the premiums. If it is the latter, talk to your insurance company about reducing your death benefit or switching to a cheaper policy rather than withdrawing and losing coverage entirely.
Frequently Asked Questions
Can I withdraw money from a term life insurance policy?
No. Term life policies have no cash value, so there is nothing to withdraw. They provide pure death benefit coverage for a set period (10, 20, or 30 years) and build no savings component. If you need access to cash, you would need a permanent policy like whole life or universal life.
Will withdrawing from my life insurance affect my credit?
No. Withdrawals from life insurance are not reported to credit bureaus and do not affect your credit score. They are a transaction between you and your insurance company, not a loan or debt.
What happens if I withdraw more than my cost basis?
The amount over your cost basis is treated as taxable income. If you withdraw $60,000 and your cost basis is $50,000, you owe income tax on the $10,000 difference in the year you withdraw it. Your insurance company will send you a Form 1099-R for tax reporting purposes.
Can I withdraw money and then re-deposit it into my policy?
Yes, some policies allow you to put money back, but it is not automatic. You would need to contact your insurance company and ask whether your specific policy permits this. Even if allowed, you cannot simply reverse the withdrawal — you are making a new deposit that increases your cash value again.
How do I know my policy's cash value?
Your insurance company can tell you over the phone or through your online account portal. You can also check your most recent policy statement, which usually lists the current cash value. If you have not received a statement recently, call and request one.