Ask the Life Insurance Expert

Can I draw money from my life insurance policy?

It depends on what type of life insurance policy you own. Term life, which provides coverage for a certain period of time (such as 10, 15 or 20 years), does not have any cash value. It pays a death benefit to the policy's beneficiary if you die within the term. You cannot borrow money from the policy or cash it in. If you don't die within the term, the policy pays out nothing.

[Let Insure.com help you find affordable life insurance now.]

Permanent life insurance -- such as whole life, universal life and variable universal life -- covers an insured's entire lifetime and features a cash value account, which grows tax-deferred over time and functions as a sort of long-term savings vehicle. Life insurance rates for permanent life insurance are much higher than for term life because coverage is provided no matter when you die and a portion of the annual premium goes toward building the cash value.

You can borrow from the cash value account, or use it to pay premiums once it's reached a certain level, a policy scenario known as being "paid up." Beware, though, that the death benefit is reduced if you die before you have repaid a loan you took out against the policy. Also, non-loan withdrawals from life insurance policies are taxable at your ordinary income tax rate.

Contact the life insurance company or talk to your life insurance agent to discuss options. Although the cash value can serve as a valuable financial resource while you're living, it disappears when you die. With most policies, the beneficiary is paid the death benefit, and the life insurance company absorbs the cash value after your death.

Some experts suggest older life insurance policyholders who think they'll never tap into the cash value should ask for a higher death benefit in exchange for the policy's accumulated cash value.

For more, see Life insurance basics.

Last updated: Jan. 12, 2012
Insure.com Redesign Survey