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Life insurance provides pivotal financial protection to your family after you die, but some policies can be accessed while you’re alive. These policies are called cash value life insurance. A policy’s cash value functions similarly to a long-term savings vehicle and that amount of money grows tax-deferred over time.

While you can withdraw money from a cash value life insurance, whether or not you should depends on your unique background and financial needs. You cannot withdraw money from term life insurance.

What type of life insurance has a cash value?

Permanent life insurance policies such as whole life, indexed universal, and universal life, have a cash value.When you make a premium payment, part of the premium pays for the death benefit, and the other pays into the cash value.

Because cash value life insurance is always a type of permanent life insurance, it lasts for the insured’s entire lifetime.

How to cash out a life insurance policy

Policyholders can make cash withdrawals or loans against most permanent life insurance policies. Another option is to cancel your policy, which would allow the cash value to go back to the policyholder minus any fees.

“You can borrow or take partial surrender of life insurance additions with whole life insurance. With universal life insurance, you can surrender from the accounting value,” said Paul Lapiana, CFP, head of MassMutual Brand, Product & Affiliated Distribution.

The downside of canceling your life insurance is that you lose the death benefit.

Guidelines for withdrawing money from your cash value life insurance policy

With cash value life insurance, policies allow you to borrow from the value of your life insurance or use it to pay policy premiums after it’s reached a certain level. When you use the cash value to pay your premiums, it is considered “paid up.”

You can withdraw from your life insurance policy and pay taxes on the money at your ordinary income tax rate. To avoid taxes, you can take out a loan against the policy. But if you take out a cash loan against your life insurance policy, you’ll want to pay up the loan amount before you die. Borrowing from your life insurance policy’s cash value will likely come with interest, however, which you will have to pay back, too.

If you die with an outstanding loan balance, the money will be deducted from the death benefit, so your beneficiaries will receive less from your insurer.

Some people choose this option because getting cash from your life insurance won’t show up on your credit report unlike credit cards and bank loans.

Although the cash value can serve as a valuable financial resource while you’re alive, it is given to the insurance company when you die. It cannot be used by your beneficiaries — they only receive the death benefit. With most policies, the beneficiary is paid the benefit when you die, and the life insurance company absorbs the cash value after your death.



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Selling a life insurance policy for cash

Known as a life settlement, you can sell your life insurance policy for cash.

Certain companies and brokers handle these types of sales, which usually take a few months to finalize. When you sell a policy, you no longer make monthly premium payments and when you die, the new owner receives your insurance payout.

Requirements for a life settlement

There are a few requirements for a life settlement:

  • Policyholder needs to be 65 or older
  • Policy needs to be larger than $100,000
  • If it’s a term policy, it has to be converted to permanent

Frequently Asked Questions

Do you pay taxes on life insurance cash out?

You can withdraw up to the amount that you have paid in premiums on a life insurance policy — minus fees — and not pay taxes. If you withdraw more than you have paid, the additional amount will be taxed.

“You can withdraw or surrender up to the cost basis tax-free,” Lapiana says.

How long does it take to cash out a life insurance policy?

Cashing out a policy generally takes one to two weeks.

What are the tax consequences of cashing out a life insurance policy?

If you withdraw money from the cash value policy, once you exceed the amount you’ve already paid in premiums, the rest is taxable.

Although most whole life insurance policies allow you to withdraw money at any time, some have restrictions. For instance, some whole life policies may make any withdrawals in the first few years taxable.

As always, reaching out and speaking to a professional is your best bet as a starting point. Contact the life insurance company or talk to your life insurance agent to discuss options.

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