Can You Take Out Money From Your Life Insurance Policy?

Life insurance policies offer financial protection to beneficiaries upon the policyholder’s death. However, certain policies can also be a financial resource during the policyholder’s lifetime, allowing access to accumulated funds from their value. Not all policies offer this; only those with a savings component allow access to funds before a death benefit is paid.

Policies That Build Cash Value

Life insurance policies are broadly categorized into two types: term life and permanent life insurance. Term life insurance covers a specific period and typically does not build cash value. Permanent life insurance provides lifelong coverage and includes a “cash value” component.

This cash value is a savings element that accumulates over time. A portion of premiums contributes to it, growing tax-deferred through interest or investment gains. The cash value is distinct from the death benefit.

Several types of permanent life insurance policies accumulate cash value:
Whole life insurance offers guaranteed cash value growth at a fixed rate, fixed premiums, and a guaranteed death benefit.
Universal life insurance provides flexibility, allowing adjustments to premiums and death benefits, with cash value growth based on current interest rates.
Variable universal life insurance allows policyholders to invest cash value in sub-accounts, similar to mutual funds, offering potential for higher returns but also greater risk.
Indexed universal life insurance links cash value growth to a market index, often with safeguards against market downturns and caps on gains.

Ways to Access Policy Cash Value

Policyholders with permanent life insurance can access accumulated cash value through several methods. Each approach functions differently regarding how funds are obtained and the policy’s status.

One common method is a policy loan, where the policyholder borrows money from the insurer, using the cash value as collateral. No credit check is involved, and the policy remains in force. Interest is charged, and repayment schedules are often flexible.

Another way is through withdrawals, where a policyholder takes out a portion of the cash value. This reduces the policy’s cash value and can also reduce the death benefit. Unlike loans, withdrawals generally do not need repayment, and the policy usually remains active, though with reduced value and coverage.

Finally, a policyholder can surrender the policy, terminating coverage entirely for its cash surrender value. This value is the accumulated cash value minus any surrender charges or outstanding loans. Upon surrender, the policy ceases to exist, and the death benefit is forfeited.

Consequences of Accessing Funds

Accessing funds from a life insurance policy carries financial and tax implications that vary by method. Understanding these consequences is important for informed decisions.

Policy loans are generally not taxable income as long as the policy remains in force. However, if the policy lapses or is surrendered with an outstanding loan balance exceeding premiums paid, the loan amount could become taxable. Any unpaid loan balance and accrued interest reduce the death benefit. If the loan plus interest exceeds the cash value, the policy could lapse, leading to coverage loss and potential tax liability.

Withdrawals are generally tax-free up to the “cost basis,” which is the total premiums paid. Any amount exceeding this cost basis is typically taxable. Withdrawals directly reduce the policy’s cash value and diminish the death benefit.

Surrendering a policy has significant consequences. The difference between the cash surrender value received and the total premiums paid (the cost basis) is taxable. If the policyholder receives more than they paid, that gain is taxable. Surrendering terminates coverage, eliminating the death benefit. Surrender charges may also apply, especially in early years, further reducing the amount received.

Steps to Access Your Funds

Accessing funds from your life insurance policy involves a straightforward process. First, contact your life insurance company or agent to inform them of your intent. They can provide guidance tailored to your policy and chosen access method.

You will likely need to complete specific forms from the insurer. These forms require details such as your policy number, desired amount, and preferred disbursement method (loan, withdrawal, or surrender). Processing times vary, but funds are typically disbursed within 14 to 60 days after the request is processed.