Can I Pull Money From My Life Insurance?

Life insurance policies primarily protect beneficiaries after the policyholder’s passing. However, certain types also offer accessible funds during the policyholder’s lifetime, providing financial flexibility for various needs. Not all policies offer this feature; those that do accumulate cash value, which can be accessed under specific conditions.

Understanding Life Insurance Cash Value

Cash value represents a savings component within certain permanent life insurance policies, growing over time separate from the death benefit. A portion of each premium is allocated to this account, typically earning tax-deferred interest.

Permanent life insurance policies (whole, universal, and variable universal life) typically build cash value. Whole life insurance generally offers a guaranteed, fixed rate of return on its cash value. Universal life policies offer flexible premium payments and death benefits, with cash value growth tied to an interest crediting rate. Variable universal life allows policyholders to invest the cash value in various market-based options, with market risk.

In contrast, term life insurance policies do not build cash value. These policies provide coverage for a specific period, such as 10, 20, or 30 years, and only pay a death benefit if the insured passes away within that term. Without a cash value component, term life insurance does not offer a mechanism for accessing funds while the policyholder is alive.

Accessing Your Policy’s Cash Value

Permanent life insurance policyholders have several methods to access accumulated cash value. These options include taking a policy loan, making partial withdrawals, or surrendering the policy entirely.

Policy loans allow borrowing directly against the policy’s cash value. The cash value serves as collateral, and a credit check is generally not required. Insurers typically charge an interest rate on these loans, which accrues over time. While no fixed repayment schedule exists, any outstanding loan balance and accrued interest will reduce the death benefit if not repaid. Initiating a policy loan typically requires contacting the insurer and submitting a loan request form.

Partial withdrawals take out a portion of the cash value. Unlike a loan, a withdrawal permanently reduces the policy’s cash value and, consequently, the death benefit. This reduction is immediate and not contingent on repayment. The process requires communication with the insurer and necessary paperwork.

Policy surrender involves terminating the entire life insurance policy in exchange for its cash surrender value. This ends insurance coverage, meaning no death benefit will be paid to beneficiaries. The cash surrender value is generally the accumulated cash value minus any surrender charges and outstanding loans. Surrendering a policy requires a formal request to the insurer, who will then process the termination and disburse the net cash surrender value.

Accelerated Death Benefit Options

Beyond accessing a policy’s cash value, policyholders may also access their life insurance through accelerated death benefit riders (living benefits). These provisions allow a portion of the policy’s death benefit to be paid out early while the insured is still alive, triggered by specific qualifying conditions.

Qualifying conditions for accelerated death benefits include terminal, chronic, and critical illness. A terminal illness rider allows access if the policyholder is diagnosed with a condition expected to result in death within a specified period (often 12 to 24 months). Chronic illness riders provide access if the policyholder cannot perform a certain number of activities of daily living or requires substantial supervision due to cognitive impairment. Critical illness riders allow a payout upon diagnosis of a severe medical condition.

Applying for accelerated death benefits usually involves providing medical certification to the insurer. The insurer reviews medical records to determine if criteria are met. If approved, a portion of the death benefit is paid out, which then reduces the amount that will eventually be paid to the beneficiaries. These benefits help cover medical expenses, long-term care costs, or other financial needs that arise from severe health conditions.

Implications of Accessing Policy Funds

Accessing funds from a life insurance policy carries several important implications. These affect the policy’s value, tax treatment, and long-term viability.

Tax implications vary depending on the method of access. Policy loans are generally considered tax-free distributions, treated as debt against the cash value. However, if the policy lapses with an outstanding loan, the loan amount exceeding premiums paid could become taxable income.

Partial withdrawals are typically tax-free up to the amount of premiums paid into the policy (cost basis). Any amount withdrawn beyond the cost basis is generally considered taxable income.

When a policy is surrendered, the cash surrender value received is taxable if it exceeds the total premiums paid. Accelerated death benefits are often tax-exempt under certain conditions, particularly if used for qualified long-term care expenses or if the insured is terminally ill.

Any access to a policy’s funds (loan, withdrawal, or accelerated death benefit) directly impacts the eventual death benefit. An outstanding policy loan, along with any accrued interest, will be subtracted from the death benefit. Similarly, partial withdrawals permanently reduce both the cash value and the death benefit by the withdrawn amount. Accelerated death benefits pay out a portion of the death benefit early, thereby reducing the remaining amount available for beneficiaries.

Accessing policy funds can also increase the risk of the policy lapsing. Outstanding loans, especially if interest accrues and is not paid, can deplete the cash value. If the cash value falls below a certain threshold, it may no longer be sufficient to cover policy charges. This, combined with insufficient premium payments, can lead to policy lapse, ending coverage and forfeiting the death benefit.