Can You Take Money Out of Life Insurance?

Life insurance policies provide financial protection for beneficiaries after the policyholder’s passing. Certain types also offer a living benefit through a cash value component, a savings element that accumulates over time within the policy, separate from the death benefit. Policyholders can access this accumulated cash value during their lifetime. The ability to take money out of a life insurance policy depends on the specific policy type and the methods chosen for access.

Types of Life Insurance with Cash Value

Permanent life insurance policies include a cash value component, distinguishing them from term life insurance, which only provides a death benefit for a specific period. Three common types of permanent life insurance that build cash value are Whole Life, Universal Life, and Variable Universal Life.

Whole Life insurance is known for its guarantees, including a fixed premium, a guaranteed death benefit, and cash value that grows at a guaranteed interest rate. A portion of each premium payment is allocated to this cash value, which steadily increases over the policy’s lifetime. The growth rate is set by the insurer and is not affected by market fluctuations.

Universal Life (UL) insurance offers more flexibility than Whole Life, allowing adjustments to premium payments and the death benefit within certain ranges. The cash value in a UL policy grows based on an interest rate declared by the insurance company, which may adjust periodically but often includes a guaranteed minimum rate.

Variable Universal Life (VUL) insurance provides even greater flexibility, allowing policyholders to allocate the cash value to various investment sub-accounts, similar to mutual funds. The cash value growth is tied to the performance of these chosen investments, offering the potential for higher returns. However, it also carries more risk, as both cash value and the death benefit can decrease if investments perform poorly.

Ways to Access Your Policy’s Cash Value

Policyholders have several methods to access the cash value accumulated within their permanent life insurance policy. These methods include taking a policy loan, making a partial withdrawal, or surrendering the policy entirely.

A policy loan involves borrowing money from the insurance company, using the policy’s cash value as collateral. This process does not require a credit check or a formal approval process, as the loan is secured by the policy’s own value. The cash value continues to earn interest or investment gains even while a loan is outstanding. Repayment terms are flexible, allowing policyholders to repay at their discretion or not at all.

Partial withdrawals allow policyholders to remove a portion of their cash value from the policy. This method reduces the policy’s cash value and can also lead to a decrease in the death benefit. Withdrawals differ from loans as they are not repaid and permanently reduce the policy’s value.

Surrendering the policy means canceling the entire life insurance contract in exchange for its cash surrender value. This option liquidates the policy, ending all coverage and forfeiting the death benefit. The cash surrender value is the accumulated cash value minus any applicable surrender charges and outstanding loans.

Understanding the Financial and Tax Impact

Accessing a life insurance policy’s cash value carries specific financial and tax implications that vary by the chosen method.

When taking a policy loan, interest accrues on the borrowed amount, with rates ranging from 5% to 8%. While policy loans are not considered taxable income, an unpaid loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries. If the loan balance, along with interest, exceeds the policy’s cash value and the policy lapses, the outstanding loan amount may become taxable as ordinary income.

Partial withdrawals from a policy’s cash value reduce both the cash value and the death benefit. For tax purposes, withdrawals are tax-free up to the amount of premiums paid into the policy, which is considered the cost basis. Any amount withdrawn that exceeds this cost basis is taxed as ordinary income.

Surrendering a policy results in the termination of coverage and the forfeiture of the death benefit. The cash surrender value received is the cash value less any surrender charges, which can be significant, especially in the early years of the policy. Any amount received upon surrender that exceeds the total premiums paid (the cost basis) is considered a taxable gain and is subject to ordinary income tax.

The Process for Accessing Funds

Initiating the process to access your life insurance policy’s cash value begins with contacting your insurance provider. This initial contact allows you to confirm your policy’s cash value and understand the specific forms required for your chosen access method, whether it’s a loan, withdrawal, or surrender. Insurance companies have dedicated customer service departments or online portals to facilitate these inquiries.

Upon request, the insurance company will provide the necessary forms, which must be completed with personal details and policy information. These forms will specify the amount you wish to borrow or withdraw, or indicate your intent to surrender the policy. Review all sections of the form carefully to ensure all required fields are filled out.

Once the forms are completed, they can be submitted through various channels, including mail, fax, or secure online portals provided by the insurer. Some companies offer in-person submission at local offices. After submission, the insurance company processes the request, which can take anywhere from a few business days for loans to several weeks for surrenders. Upon approval, the funds are disbursed via check or direct deposit, according to the method specified in your request.