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Jessica Walrack is a personal finance writer who has written hundreds of articles about loans, insurance, banking, mortgages, credit cards, budgeting, and general personal finance. Her work has appeared on The Balance, Bankrate, and Supermoney, among other publications.
Updated June 15, 2024 Reviewed by Reviewed by Thomas J. CatalanoThomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Fact checked by Fact checked by David RodeckDavid is a financial content writer in New York City. He specializes in covering insurance, investing, and retirement planning. Before writing full-time, he worked as a financial advisor and passed both the CFP and Series 6 exams.
If you have a permanent life insurance policy that has accumulated a significant amount of funds in its cash value, you can use that money while you’re alive to pay premiums, take out a loan, or withdraw cash permanently. If you withdraw enough, you’ll surrender the policy. You may also be able to recoup the cash value by selling the policy to someone else.
Your cash value typically does not get passed on to your beneficiaries after you die, so you may want tap into it to supplement your retirement income, fund a house remodel, or pay for a grandchild’s college tuition.
However, it’s important to weigh your options carefully—the way you access your cash value will impact the amount available to you, your death benefit, and your account’s growth.
Many life insurance policies contain a cash value component—but not all. Term policies lack this feature, while most permanent policies include it.
Here’s a look at four popular permanent life insurance types with cash value components:
The right fit for you will depend on your risk tolerance, investment knowledge, and flexibility preferences.
If you’re thinking about pulling cash out of your life insurance policy, here are five ways you can do so.
The premiums on permanent life insurance policies can be expensive, ranging from a couple hundred dollars a month for a healthy 30-year-old paying for a $500,000 whole life policy, to four times that much for a healthy 60-year-old. One potential way to tap into your cash value is to use it to cover your life insurance premiums.
Once your cash value reaches a certain point, some insurers and policies let you use it to pay for your coverage. This can be helpful if, for example, you retire and need to reduce your monthly expenses but want to keep your policy in place.
Any amount taken from your cash value account and not repaid before your death will reduce the death benefit paid to your beneficiary.
Another option is to take out a life insurance loan against your cash value balance. Insurers often offer loans once policyholders have paid a certain amount into the policy.
Life insurance loans can be helpful for those who want a low-cost, flexible way to tap into their cash value while keeping their coverage in place.
To apply, you’ll typically submit a form and verify your identity. No credit or income checks are required because the loan is guaranteed by your policy. You will not owe income tax for taking out cash value with loans, even if you borrow more than what you’ve paid in premiums—as long as you pay it back, either while alive or with the policy death benefit.
While cash value loans come with interest charges, the rates are typically lower than those on home equity or personal loans. The loan terms are also more lenient. You can often borrow up to 90% of your policy’s value and repay it whenever you want.
However, an outstanding loan could reduce your cash value growth. And if you die before paying off the loan, the outstanding balance will be deducted from the death benefit your beneficiary receives.
It’s important to know your current loan balance and how it compares to your actual cash value amount. Interest will accrue and get added to your loan balance if it’s not paid off. If the loan balance ends up exceeding the value of your policy, your policy can lapse.
Another option is to withdraw funds from your policy. You can withdraw up to the amount you’ve paid without paying any income taxes. However, if you withdraw more than you paid in premiums, you will owe income tax on any earnings.
In addition, a withdrawal will typically result in a reduction in your death benefit—sometimes for even more than you’ve taken out, depending on your policy. It will also set back the growth of your cash value account.
If you’re okay with ending your policy, you can cancel it and receive a surrender cash value payment. This payment may be a lump sum or it may be paid over time.
While this can allow you to access a large portion of your cash value, you’ll no longer have life insurance coverage, so your beneficiary won’t receive a death benefit. Further, surrender fees and taxes could reduce the amount you receive.
If you’re considering this route, contact your insurer to find out what your surrender value is and what fees apply. The fees are usually higher for newer policies and don’t apply after 10 to 15 years.
You may owe taxes if your surrender value is higher than the amount you’ve paid into the policy.
You might also be able to sell your policy through a life settlement or viatical settlement. Both involve selling your life insurance policy to a third party for more than the cash surrender value but less than the death benefit. For example, Harbor Life Settlements says you can get up to 60% of the death benefit, and claims it helps customers get four to 11 times more than their cash surrender values.
Once a sale is complete, the buyer becomes responsible for paying your insurance premiums and maintenance fees for the rest of your life. Then, when you pass away, they receive the policy’s death benefit.
If you want to explore this option, you can sell directly to a company or work with a broker that helps you get the best deal (and charges a commission to your buyer).
Not all policies can be sold. Buyers or brokers may have requirements on the policy type, the age of the policyholder, the policy’s face value, and more. Further, some states require you to have your policy for a certain number of years (two to five) before you can sell it.
Your life insurance policy’s cash value—the total sum accumulated in your cash value account—can be found by contacting your insurance provider. You can also usually find it by logging into a member portal where all of your account information is located or by checking your insurance statement.
You can withdraw up to the amount offered in your surrender cash value payment, which is the cash value amount minus any applicable fees.
If you don’t use your cash value before you die, in most cases, the insurer will absorb it. But some whole life policies are written so that the cash value is used to increase your death benefit. Either way, if you withdraw from your cash value or don’t repay a policy loan, your beneficiaries could receive a smaller death benefit than if you had not taken the money out of the policy.
It typically takes two to five years to build cash value in a life insurance policy. Check with your insurer for details on your specific policy and what you can expect.
The best way to access your cash value will depend on your situation. If you’d like to take out cash but leave your policy and death benefit in place, consider a life insurance loan, a withdrawal, or using the cash to cover your premium payments. On the other hand, if you want to give up coverage and withdraw as much as possible, consider a surrender or a sale.
The ability to access cash value can be very handy for life insurance policyholders, but the consequences are far-reaching. Be sure to consider the costs, tax implications, and impact on your larger financial plan. If you have any doubts or concerns, it can be helpful to consult a financial advisor.
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Group term life insurance is life insurance offered as an employee benefit. Often a base amount is covered at no charge, with the option to add more.
Guaranteed universal life insurance offers affordable permanent coverage, level premiums, a guaranteed death benefit, and may include a cash value component.
A waterfall concept is a method of intergenerational wealth transfer that utilizes a rollover of a life insurance policy to a child or grandchild.
Second-to-die insurance is a type of life insurance on two people providing benefits to the beneficiaries only after the last surviving person dies.
Adjustable life insurance allows policyholders the option to change key features like premiums and the death benefit.
Life insurance is a contract in which an insurer, in exchange for a premium, guarantees payment to an insured’s beneficiaries when the insured dies.
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