How to Take Money Out of a Life Insurance Policy

Life insurance policies primarily protect beneficiaries after a policyholder’s death. However, some policies can also provide financial resources during the policyholder’s lifetime. Understanding these access methods offers flexibility for unexpected needs or financial planning, depending on the policy’s structure and accumulated value.

Understanding Your Policy’s Cash Value Access Options

Many permanent life insurance policies, like whole life and universal life, include a cash value component. This savings feature grows tax-deferred as premiums are paid. Policyholders can access this financial asset while the policy remains active.

Policy loans allow you to borrow money directly from the insurer, using your policy’s cash value as collateral. These loans do not require credit checks and offer flexible repayment terms, with interest rates often between 5% and 8%. Loan proceeds are not taxable income if the policy remains in effect and is not a Modified Endowment Contract (MEC). However, interest accrues, and unpaid interest can reduce the policy’s cash value and death benefit.

Partial withdrawals, or partial surrenders, remove a portion of the cash value from the policy. This reduces both the cash value and the death benefit. Withdrawals are tax-free up to the amount of premiums paid, known as the cost basis. Any amount exceeding the cost basis is taxable as ordinary income. Universal life policies provide more flexibility for partial withdrawals than whole life policies.

A full surrender terminates the policy, and the insurer pays out the accumulated cash value, minus any surrender charges. These charges are higher in the policy’s early years. Any amount received from a full surrender that exceeds total premiums paid is a taxable gain. This gain is taxed as ordinary income, potentially increasing your tax liability.

Before choosing an option, understand your policy’s specific terms. This includes the current cash value, loan interest rates, surrender charges, and cost basis. Accessing cash value can impact the policy’s future performance and may lead to its lapse if the cash value is depleted or outstanding loans exceed it.

Utilizing Your Policy’s Living Benefits and Settlement Options

Beyond cash value access, some life insurance policies offer living benefits, allowing policyholders to receive funds during their lifetime under specific circumstances. These are often riders or add-ons. Accelerated death benefits, for example, provide access to a portion of the death benefit if the policyholder is diagnosed with a terminal or chronic illness.

To qualify for accelerated death benefits, a medical professional must certify a limited life expectancy (e.g., 12-24 months for terminal illness) or the need for assistance with daily living activities for chronic illness. The payout reduces the amount paid to beneficiaries. Under HIPAA, these payments are not subject to federal income tax for terminally or chronically ill individuals, offering financial relief.

Selling your life insurance policy to a third party is another option. A viatical settlement is for individuals with a terminal illness, usually with a life expectancy of two years or less. The policyholder sells their policy for a lump sum, which is more than the cash surrender value but less than the full death benefit. Viatical settlement proceeds for terminally ill individuals are tax-exempt under federal law.

For policyholders not terminally ill who no longer wish to maintain their policy, a life settlement is an alternative. This involves selling the policy to a third-party investor, often for individuals over age 65 with a health change since issuance. The financial outcome is higher than the cash surrender value but lower than the death benefit. Life settlement proceeds are taxed in tiers:
The amount up to the policy’s cost basis (total premiums paid) is tax-free.
Any gain exceeding the cost basis but below the cash surrender value is taxed as ordinary income.
Any amount received above the cash surrender value is subject to capital gains tax.

Initiating Your Request and Important Considerations

After determining the best option, initiate a request with your insurance provider. Contact their customer service department by phone or online. Many companies provide specific forms for policy loans, withdrawals, surrenders, or living benefit claims.

When submitting your request, provide your policy number, personal identification, and any required forms. Accelerated death benefit claims require medical documentation certifying the illness. Insurers process requests within weeks, with disbursement often occurring within 30 to 60 days once approved. The payment method, whether check or direct deposit, will be confirmed.

Accessing funds during your lifetime reduces the death benefit paid to beneficiaries. This reduction can impact the financial security intended for your loved ones.

Understand the tax implications. While policy loans or accelerated death benefits for qualifying illnesses may be tax-free under certain conditions, withdrawals exceeding your cost basis or gains from surrendering a policy can be taxable. Consult a qualified tax professional to understand specific tax consequences. Loans or withdrawals can increase the risk of your policy lapsing if cash value falls too low or loan balances grow too large, potentially leading to loss of coverage and tax liabilities.