Can I Take Out Money From My Life Insurance?

Life insurance primarily provides a financial safety net for beneficiaries. However, some policies also offer a financial resource during the policyholder’s lifetime. These policies build an accessible cash value. Understanding how this value accumulates and can be accessed is important, as it offers flexibility but also requires careful consideration.

Understanding Policy Cash Value

Cash value is a component of certain life insurance policies that grows over time and can be accessed. This value is distinct from the death benefit paid to beneficiaries. It functions like a savings or investment account within the policy.

Cash value accumulates on a tax-deferred basis, meaning earnings are not taxed until withdrawn. A portion of each premium payment is allocated to this component. Over time, this amount, combined with credited interest or investment gains, causes the cash value to increase.

Only permanent life insurance policies build cash value. Whole life offers guaranteed cash value growth and level premiums. Universal life provides flexibility with adjustable premiums and death benefits, and its cash value growth fluctuates with interest rates. Variable universal life offers greater flexibility, allowing policyholders to direct cash value into investment sub-accounts, with growth tied to market performance. Term life insurance provides coverage for a specific period but does not accumulate cash value.

Options for Accessing Policy Value

Policyholders with permanent life insurance have several methods to access accumulated cash value. Each method has unique implications for the policy and its death benefit. Understanding these is essential before utilizing the policy’s value.

A common method is a policy loan, where cash value serves as collateral. The loan is an advance against the death benefit, not a direct withdrawal. Interest accrues on the outstanding balance, typically 4% to 8% annually. Policyholders can repay the loan and interest, or allow the balance to increase, which reduces the death benefit.

Another option is a partial withdrawal. Unlike a loan, a withdrawal directly removes funds from the cash value. This permanently reduces the policy’s cash value and death benefit by the amount withdrawn. Future premium payments may need adjustment to maintain policy viability, especially for substantial withdrawals.

Finally, a policyholder can surrender the policy entirely. Surrendering terminates the contract, providing the net cash surrender value (cash value minus surrender charges and outstanding loans). This immediately ends all insurance coverage, including the death benefit. Surrender charges typically apply during initial years, decreasing over time.

Financial and Policy Consequences

Accessing funds from a life insurance policy’s cash value carries financial and policy consequences. These impacts include tax obligations, death benefit amount, policy lapse risk, and future cash value growth. Each method has specific repercussions.

Policy loans are not taxable income while the policy remains in force. However, if the policy lapses or is surrendered with an outstanding loan exceeding the policy’s cost basis (total premiums paid less prior tax-free withdrawals), the excess becomes taxable income. This occurs because the initially tax-free loan becomes a taxable distribution upon policy termination.

Withdrawals are tax-free up to the policy’s cost basis. This means amounts not exceeding total premiums paid are not subject to income tax. Any amount exceeding this cost basis is taxable income, subject to ordinary income tax rates.

Surrendering a policy also has tax implications; the difference between the cash surrender value and the policy’s cost basis is taxable income. For example, if the cash surrender value is $50,000 and premiums paid were $30,000, the $20,000 gain is taxable. This gain is taxed at ordinary income rates, as it is considered a return on investment.

Outstanding policy loans or partial withdrawals directly reduce the death benefit. If a policyholder dies with an outstanding loan, that balance plus accrued interest is deducted from the death benefit. Partial withdrawals permanently reduce the death benefit by the amount withdrawn.

Accessing cash value increases policy lapse risk. If loan interest depletes cash value, or significant withdrawals leave insufficient funds for policy charges, the policy could terminate, leading to loss of coverage. Reducing cash value through loans or withdrawals impedes future growth. A smaller cash value base means slower overall growth, as it’s the foundation for future gains.

Initiating a Request for Funds

After evaluating options, initiating a request to access funds is procedural. Contact the life insurance company directly, via customer service, online portal, or a licensed agent.

The insurer will provide forms specific to the desired action (loan, withdrawal, or surrender). These forms require basic policy information, the policyholder’s signature, and requested details. Identification verification may also be required to protect against fraud.

Submit completed forms via secure online portals, mail, or fax. Keep copies of all submitted documents for personal records. Processing typically takes a few business days to a couple of weeks, depending on complexity.

Once processed and approved, funds are disbursed per policyholder instructions. Common methods include direct deposit or mailed check. Monitor accounts or mail for funds and review statements detailing the transaction and its policy impact.