Ask the Life Insurance Expert

Can you cash in a life insurance policy that is paid up?

Yes. Permanent life insurance, such as whole life, universal life or variable universal life, covers you for your entire lifetime and features a cash value account. (Term life insurance covers you for a specified number of years and does not feature a cash account.)

When you're paid up -- which means you have enough cash value to cover your premium payments -- you can terminate the policy and take the cash.

But first, make sure you no longer need this life insurance policy. After all, you probably invested a lot of money in premiums over the years, and cashing out means your beneficiaries won't receive any of the benefits when you die.

Typically the cash account grows slowly at first and then picks up speed, growing each year with interest, tax-deferred. The Society of Actuaries says it takes an average 12 to 15 years for the cash value to exceed premium payments on a whole life policy and 15 to 20 years on universal life insurance, depending on how much premium you've paid.

Another option for accessing the money is to take out a loan against the cash value. You pay interest when you repay the loan, but the rate is generally lower than what you'd pay on a bank loan. Your death benefit is reduced if you don't repay the loan. The amount of the reduction depends on the policy; with some whole life insurance polices, the death benefit is reduced by more than the amount of the loan.

Read more, read about cash value in life insurance.

Last updated: Sep. 15, 2010
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