Cameron Huddleston is an award-winning journalist with nearly 20 years of experience writing about personal finance. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. F.
Cameron Huddleston ContributorCameron Huddleston is an award-winning journalist with nearly 20 years of experience writing about personal finance. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. F.
Written By Cameron Huddleston ContributorCameron Huddleston is an award-winning journalist with nearly 20 years of experience writing about personal finance. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. F.
Cameron Huddleston ContributorCameron Huddleston is an award-winning journalist with nearly 20 years of experience writing about personal finance. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. F.
Contributor Michelle Megna Lead Editor, InsuranceMichelle is a lead editor at Forbes Advisor. She has been a journalist for over 35 years, writing about insurance for consumers for the last decade. Prior to covering insurance, Michelle was a lifestyle reporter at the New York Daily News, a magazine.
Michelle Megna Lead Editor, InsuranceMichelle is a lead editor at Forbes Advisor. She has been a journalist for over 35 years, writing about insurance for consumers for the last decade. Prior to covering insurance, Michelle was a lifestyle reporter at the New York Daily News, a magazine.
Michelle Megna Lead Editor, InsuranceMichelle is a lead editor at Forbes Advisor. She has been a journalist for over 35 years, writing about insurance for consumers for the last decade. Prior to covering insurance, Michelle was a lifestyle reporter at the New York Daily News, a magazine.
Michelle Megna Lead Editor, InsuranceMichelle is a lead editor at Forbes Advisor. She has been a journalist for over 35 years, writing about insurance for consumers for the last decade. Prior to covering insurance, Michelle was a lifestyle reporter at the New York Daily News, a magazine.
| Lead Editor, Insurance
Updated: Oct 10, 2023, 3:29pm
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Life insurance can provide much-needed cash for loved ones you leave behind when you die. That financial safety net for those who depend on you for support is the primary reason to buy a policy.
But life insurance also can provide cash for you while you’re living—that is, if you have a cash value life insurance policy. This is one of the perks of a permanent policy and a key reason it costs more than a term life insurance policy (along with lasting your entire life).
You can access the cash in a variety of ways. That’s right: It’s yours for the taking. Before you do this, though, understand your options and the pros and cons of each.
With a cash value life insurance policy, like whole life or universal life insurance, you can access the cash value. One of the ways to do that is to cash out or surrender the policy. If you choose to cash out your policy, you’ll receive the cash value minus any surrender fees. Surrendering the policy will end the policy.
If you don’t want to cancel your policy entirely, you can withdraw or take out a loan from your cash value.
If you want to cash out a policy by removing all the cash value and stopping all premium payments (and coverage), you can surrender the life insurance policy. But before you cash out, consider your overall financial plan and if you have enough assets to leave behind for your dependents if you die.
Here are ways to access some or all of the cash in a permanent life insurance policy:
Because the cash in a permanent life insurance policy is yours, you can withdraw it when you want. Simply call your insurance company to let it know how much you want to withdraw, and it will wire the cash to you or deposit it into your bank account, says Josh Hargrove, a Certified Financial Planner with Insight Wealth Partners in Plano, Texas.
Withdrawing cash from a life insurance policy will reduce the death benefit.Withdrawals are taken first from your “basis”—the amount you’ve paid into cash value through premiums. That money comes out tax-free because it’s considered a return of your basis. For example, if you have $50,000 in cash value and $30,000 of that is your basis, you could withdraw $30,000 tax-free. If you tap the earnings portion, though, you’ll have to pay taxes on the gains at your regular income tax rate, Hargrove says.
Withdrawing cash from a life insurance policy also will reduce the death benefit. That means your beneficiaries will get less when you die—which is something to consider before withdrawing cash from a policy.
Rather than withdraw cash from your policy, you can borrow it.
Borrowing from your life insurance policy can be a fast and easy way to get cash for a purchase such as a car, for retirement income or to help cover costs temporarily if you lose a job.
“Loans are the most common way policy owners access cash in a policy as they are completely tax-free,” says Chris Abrams, founder of Abrams Insurance Solutions in San Diego (as long as you’re not borrowing from a modified endowment contract).
Plus, you don’t have to pay back the amount you borrow. But if you don’t pay it back, the loan amount and interest will be deducted from the death benefit that is paid to beneficiaries.
Like any loan, though, there’s a charge to borrow. So, the amount owed will grow over time due to interest charges.
When borrowing from cash value, be careful not to borrow too much and cause the policy to lapse in the future.
The benefit of a policy loan is that you can continue to earn interest on the outstanding loan amount. For example, if the interest rate on the loan is, say, 5% and the return on your cash value is 7%, you’d still earn 2% on the amount you’ve borrowed, Abrams says. On the flip side, if the rate of return dropped to 0% in a down market, you’d have to pay the full 5% interest rate on the loan.
When borrowing from your cash value, you have to be careful not to borrow too much. If the amount of the loan plus interest owed reaches the total cash value of the policy, the policy can lapse.
You can surrender your life insurance policy entirely to get the full cash value, minus any surrender charge. And you’ll have to pay taxes on any gains earned on the cash value portion of the policy. Plus, you’ll be giving up your life insurance coverage because surrendering a policy terminates it.
“Surrendering a policy is always the absolute last resort,” Abrams says. If you’re considering ditching your policy because you’re having trouble paying the premiums, you do have other options if you can’t pay your life insurance bill.
For example, you could reduce the policy’s face value to lower your premium, or use the cash value to convert the policy to paid-up status to keep some amount of coverage in place. You also can tap the cash value in your policy to pay your life insurance premiums temporarily if you’ve fallen on hard times. If you do this, be cautious not to deplete so much cash value that your policy lapses.
You can get more than the cash value of your policy by selling it to a third party through a process called a life settlement. The third party will pay you a lump sum that’s less than the death benefit on the policy—but more than the cash value. The buyer will then pay the policy premiums. When you die, the investor collects the death benefit.
You could consider a life settlement if you have an immediate need for cash that trumps the need for life insurance.
You must be a certain age—typically 65—or have a certain level of health impairments in order to qualify for a life settlement. You’ll have better chances of selling your policy the older you are, says Lucas Siegel, CEO of Harbor Life Settlements.
You could consider a life settlement if you have an immediate need for cash that trumps the need for life insurance.
You can be younger than age 65 to sell a life insurance policy through a life settlement, but you generally must be very ill. “Life settlements are calculated by understanding your life expectancy, and most third-party buyers prefer to purchase policies with a life expectancy of 10 years or less,” he says.
Being highly qualified by age and health condition also will help you get a bigger payment. Work with reputable life settlement companies, and get offers from more than one company.
Be aware that there can be fees associated with life settlements, and you’ll pay income taxes on the amount you receive from the sale of the policy.
If you bought a life insurance policy to provide a safety net for your loved ones, there may be better ways to get the cash you need rather than cashing out life insurance.
Compare Policies With Leading Insurers
If you cash out or surrender a life insurance policy, you’ll typically owe taxes on the difference between the cash surrender value and what you paid in premiums.
There is no penalty for cashing out a life insurance policy, but there may be a surrender charge depending on the policy and how long you have had it.
If you have a permanent life insurance policy with cash value, you can generally take out a policy loan. You can use the loan to pay off a debt or for any other purpose. You repay the policy loan, with interest, or the death benefit for your beneficiaries will be reduced to cover the borrowed amount.
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ContributorCameron Huddleston is an award-winning journalist with nearly 20 years of experience writing about personal finance. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. Follow me on Twitter @CHLebedinsky
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