You can withdraw money from a permanent life insurance policy in several ways, but the method you choose determines whether you owe taxes, lose coverage, or pay interest

Not all life insurance policies let you withdraw money. Term life insurance has no cash value — it's pure death benefit coverage that expires after a set number of years. Permanent policies (whole life, universal life, and variable universal life) build cash value over time, and that's what you can access. The three main routes are a direct withdrawal, a loan against the cash value, or a surrender of the policy. Each one works differently, costs differently, and leaves you in a different position if you die before the money runs out.

Key Takeaways

  • Only permanent life insurance policies accumulate cash value; term policies have nothing to withdraw.
  • A withdrawal reduces your death benefit dollar-for-dollar and may trigger income tax on gains above what you paid in premiums.
  • A policy loan lets you borrow against the cash value at a rate set in your contract, and you keep your full death benefit if you repay it.
  • Surrendering the policy gives you all remaining cash value but ends your coverage permanently.
  • The insurance company charges surrender fees if you withdraw or surrender within the first several years, typically 5 to 10 years.

Understanding the difference between a withdrawal and a loan

A withdrawal is money you take out and keep. The insurance company reduces your death benefit by the amount you withdraw. If your policy has $50,000 in cash value and you withdraw $10,000, your beneficiary will receive $40,000 less when you die (assuming you don't add more premiums). Any amount you withdraw above the total premiums you've paid into the policy counts as taxable income in the year you withdraw it.

A policy loan is different: you borrow against your cash value instead of taking it. You keep your full death benefit. The insurance company charges interest on the loan, usually between 5% and 8% depending on your contract, and you repay it on your own schedule — or the insurance company deducts it from your death benefit when you die. If you never repay the loan, the unpaid balance and interest reduce what your beneficiary receives. Policy loans are not taxable events, so you don't owe income tax on the borrowed amount.

The choice between the two depends on whether you plan to repay the money. If you need cash temporarily and can pay it back, a loan preserves your full death benefit and avoids taxes. If you need the money permanently, a withdrawal is simpler but costs you coverage and may cost you in taxes.

How surrender fees reduce the money you actually get

Most permanent policies include a surrender charge — a fee the insurance company takes if you withdraw money or surrender the policy within a set window, usually 5 to 10 years from when you bought the policy. The fee is highest in the first year and declines each year until it reaches zero. A policy might charge 10% of the cash value in year one, 9% in year two, and so on.

If your policy has $50,000 in cash value and you're in year three of a 10-year surrender period with a 7% charge, the insurance company takes $3,500 before you see any money. You receive $46,500. After that, any gains above your total premiums paid are taxed as ordinary income. Surrender fees don't apply to policy loans — you borrow the full cash value — but they do apply to withdrawals and full surrenders.

Check your policy document (usually called the "illustration" or "policy schedule") to find the surrender charge schedule. If you can't locate it, call your insurance company with your policy number and ask for the current surrender charge amount and when it expires.

Tax consequences of withdrawals versus loans

A withdrawal is taxable to the extent it exceeds your cost basis — the total premiums you've paid into the policy. If you've paid $30,000 in premiums and your cash value is $50,000, you can withdraw up to $30,000 tax-free. Any amount above that is taxable income. A $20,000 withdrawal in this scenario means $10,000 is taxable at your ordinary income tax rate.

A policy loan avoids this tax entirely. You're borrowing money, not withdrawing gains, so the IRS doesn't tax it. However, if the loan remains unpaid when you die, the unpaid balance reduces your death benefit, and your beneficiary receives less. Also, if the loan balance ever exceeds your cost basis (the premiums you paid), the excess becomes taxable income to you in that year — a rule that rarely applies but can happen with very old policies or policies with large loans.

Surrendering the entire policy works like a large withdrawal: you owe income tax on any cash value above your total premiums paid. If you've paid $40,000 and the policy is worth $60,000, you owe tax on $20,000 of gain.

Steps to withdraw or borrow from your policy

Contact your insurance company directly — the phone number is on your policy or billing statement. Tell them you want to withdraw money or take a policy loan. They will ask for your policy number and verify your identity. Some companies let you request this online through their customer portal, but a phone call is faster and lets you ask questions about surrender charges and tax impact before you commit.

The company will send you a form to sign. For a withdrawal, you'll choose the amount and confirm that you understand the death benefit will be reduced. For a loan, you'll sign a promissory note stating the interest rate and your repayment terms (or that you're not planning to repay it). Review the form carefully — it will show the surrender charge, if any, and the net amount you'll receive.

Processing typically takes 5 to 10 business days. The company sends a check or deposits the money directly to your bank account. If you're taking a loan, interest begins accruing immediately, so if you plan to repay it, start as soon as you can.

When a policy loan makes more sense than a withdrawal

A policy loan is the better choice if you're in a high tax bracket, if you're still within the surrender charge period, or if you want to preserve your death benefit. Borrowing $20,000 at 6% interest costs you roughly $1,200 per year in interest — far less than the tax bill on a $20,000 withdrawal if you're in the 24% federal tax bracket (which would be $4,800) plus any state income tax.

A policy loan also makes sense if you're borrowing temporarily. If you need $15,000 for a home repair and plan to repay it over three years, a loan lets you keep your full coverage while you pay it back. A withdrawal would permanently reduce your death benefit by $15,000.

The downside: if you die before repaying the loan, your beneficiary receives the death benefit minus the unpaid loan balance and interest. If your death benefit is $250,000 and you have an unpaid $30,000 loan with $5,000 in accrued interest, your beneficiary gets $215,000.

What happens if you surrender the entire policy

Surrendering means you end the policy and take all remaining cash value. The insurance company pays you the cash value minus any surrender charges and unpaid policy loans. You receive one lump sum and your coverage ends. Your beneficiary will receive nothing when you die — there is no death benefit anymore.

Surrender makes sense only if you no longer need the death benefit. Some people surrender when they're retired, their children are grown, and they have enough savings that their family doesn't depend on life insurance. Others surrender because they can't afford the premiums anymore. Before you surrender, explore whether you can reduce the death benefit (keeping some coverage) or convert to a lower-premium option instead.

If you're considering surrender because premiums are too high, call your insurance company first. Some policies let you reduce the death benefit, which lowers your premiums. Others let you use the cash value to pay premiums for a period, keeping you covered without out-of-pocket payments. These options preserve some coverage and may be better than a full surrender.

Frequently Asked Questions

Can I withdraw money from my life insurance without paying taxes?

Yes, up to the amount of premiums you've paid in. If you've paid $25,000 in premiums and your cash value is $40,000, you can withdraw $25,000 tax-free. Anything above that is taxable income. A policy loan is never taxable, but you must repay it or it reduces your death benefit.

What if I'm still in the surrender charge period?

You can still withdraw or borrow, but the insurance company deducts the surrender charge from your cash value. If your cash value is $50,000 and the surrender charge is 8%, you lose $4,000 to the fee. A policy loan avoids the surrender charge entirely — you borrow the full cash value — but a withdrawal or full surrender does not.

Will taking a policy loan affect my credit score?

No. A policy loan is not reported to credit bureaus and does not appear on your credit report. It's an internal transaction between you and your insurance company. It will not affect your credit score or your ability to borrow from banks.

What happens to my policy if I take a loan and don't repay it?

The unpaid balance and accrued interest reduce your death benefit dollar-for-dollar. If you die with a $30,000 unpaid loan, your beneficiary receives $30,000 less. If the loan balance grows to exceed your cash value, the policy may lapse and end, leaving you with no coverage.

Can I withdraw money from a term life insurance policy?

No. Term policies have no cash value — they're pure death benefit coverage. Only permanent policies (whole life, universal life, variable universal life) build cash value that you can access. If you have term insurance and need cash, you would need to surrender the policy, which ends your coverage with no payout.