Can I Cash Out My Life Insurance Policy?

Many life insurance policies offer more than just a financial payout to beneficiaries upon the policyholder’s passing. Certain types of policies include a savings component, often referred to as cash value, which can grow over time. This accumulated cash value may serve as a resource that policyholders can access during their lifetime.

Understanding Policy Types with Cash Value

Life insurance policies that build cash value are categorized as permanent life insurance. These policies remain in force for the policyholder’s entire life, provided premiums are paid. A portion of each premium payment contributes to this cash value, which grows on a tax-deferred basis.

Whole life insurance is a type of permanent policy where the cash value grows at a guaranteed interest rate, offering stability. Universal life insurance provides flexibility, allowing adjustments to premium payments and death benefits. Its cash value growth is tied to current interest rates, often with a guaranteed minimum.

Variable universal life insurance allows the policyholder to invest the cash value in various sub-accounts, similar to mutual funds. This offers potential for higher returns but carries investment risk, as cash value can fluctuate with market performance. Indexed universal life insurance links cash value growth to a market index, such as the S&P 500, typically with a floor to protect against losses and a cap on potential gains. Term life insurance policies provide coverage for a specific period and do not accumulate cash value.

Methods of Accessing Policy Cash Value

Policyholders have several ways to access the accumulated cash value within their permanent life insurance policies. Each method serves a different purpose and carries its own considerations.

One common method is taking a policy loan. This involves borrowing funds from the insurer, using the policy’s cash value as collateral. Policy loans do not require a credit check and often come with lower interest rates compared to traditional loans. While repayment is flexible, any outstanding loan balance and accrued interest will reduce the death benefit paid to beneficiaries if not repaid.

Another option is making a cash withdrawal from the policy. This directly reduces the policy’s cash value and the death benefit. Unlike a loan, a withdrawal is a permanent reduction of the policy’s value and does not need to be repaid. Policyholders can withdraw up to the amount of premiums paid into the policy without immediate tax implications.

Surrendering the policy is a third way to access cash value, which involves terminating the life insurance coverage entirely. In exchange for ending the policy, the policyholder receives the cash surrender value, which is the accumulated cash value minus any applicable surrender charges or outstanding loans. This action eliminates the death benefit and means the policyholder no longer has life insurance coverage.

Separately, accelerated death benefits, also known as living benefits, allow policyholders to access a portion of their death benefit under specific qualifying circumstances, such as a terminal or chronic illness diagnosis. These are distinct from accessing cash value, as they draw from the death benefit itself rather than the accumulated cash savings.

Financial and Policy Implications of Accessing Cash Value

Accessing a life insurance policy’s cash value can have various financial and policy-specific consequences. These implications relate to taxation, the death benefit, and the policy’s continued viability.

Taxation is a significant consideration when accessing cash value. Policy loans are not considered taxable income as long as the policy remains in force. However, if a policy with an outstanding loan lapses or is surrendered, the loan amount exceeding the premiums paid (the “cost basis”) can become taxable. For cash withdrawals, the amount received is tax-free up to the policyholder’s cost basis; amounts beyond this, representing investment gains, are subject to ordinary income tax. When a policy is surrendered, any amount received that exceeds the total premiums paid is considered taxable income.

Accessing cash value directly impacts the policy’s death benefit. Any outstanding policy loans, including accrued interest, will reduce the amount paid to beneficiaries upon the policyholder’s death. Cash withdrawals directly decrease the policy’s cash value and, consequently, the death benefit. Surrendering a policy eliminates the death benefit entirely, as coverage ceases to exist.

Significant withdrawals or outstanding loans can increase the risk of the policy lapsing. If the cash value falls too low, or if the loan balance plus interest exceeds the remaining cash value, the policy could terminate. This results in loss of coverage and potentially triggers a taxable event if the outstanding loan exceeds the cost basis. Some policies, particularly in their early years, may impose surrender charges if the policy is surrendered, reducing the cash surrender value received.

Steps to Accessing Your Policy’s Cash Value

The process to access your life insurance policy’s cash value begins by contacting your life insurance company or agent. This initial contact allows you to understand the specific requirements for your policy.

Next, request detailed information regarding your policy’s current cash value, the amount available for loans or withdrawals, and any potential surrender values. The insurer will then provide the necessary forms for a loan, withdrawal, or surrender.

Completing the required forms accurately is important. These documents will ask for your policy number, the specific amount you wish to access, and your signature. Review all sections of the form to ensure completeness before submission.

Once completed, submit the forms to the insurance company. Submission methods include mailing physical forms, uploading them through a secure online portal, or sending them via fax or secure email. After submission, the company will provide a confirmation of receipt. Processing times vary, but funds are disbursed within a few business days to a few weeks, often via direct deposit or check.