Can you cash out a life insurance policy before death?

What “cashing out your life insurance” does and doesn’t mean

Can you get money from your life insurance policy if you’re still alive? In some cases, the answer is yes.

But keep in mind that we aren’t talking about the full stated value of the policy. In other words, if you’re covered by a policy worth $25,000, you can’t “cash out” your life insurance and get $25,000. That amount is called the “death benefit” and can only be collected by your beneficiaries after you’re gone. (An exception is if the person covered is suffering from a terminal disease and has only a limited time left. In that case, the insurance company will sometimes allow a partial payment of the death benefit before death to help with end-of-life expenses.)

The money you may be able to get while you’re alive and well comes from what is known as your policy’s “cash value.” But not every life insurance policy builds cash value.

Does my life insurance have cash value?

Every time you make a payment on certain types of life insurance, the insurance company takes a portion of your payment and puts it aside. Over time, that fund gets larger and earns interest and becomes the “cash value” of your policy. How much is the cash value worth?  It all depends on the amount of your monthly premium and how long you have been paying into your policy. Often, it could eventually add up to hundreds or thousands of dollars.

The important thing to note is that cash value only accumulates in “whole life,” “universal life,” and other “permanent” life insurance policies. They are the policies that are designed to cover you for the rest of your life.

It’s a different story if you have a “term life” policy. Term life is designed to cover you for a specified period (say 10, 15 or 20 years) and then end. Because the number of years it covers are limited, it generally costs less than whole life policies. But term life policies typically don’t build cash value. So, you can’t cash out term life insurance. 

Options for cashing out a life insurance policy

Option 1: Withdraw your entire cash value

Let’s say you have a whole life policy you have been paying into for a while and you want or need money. One option could be to cash it out entirely, which would get you all the cash value you have built up, but which requires that you surrender your policy—so the coverage you wanted for loved ones will end. Generally, you will have to pay “surrender charges,” which can add up, especially if you’ve only had your policy for a few years. And you’ll also probably have to pay income taxes on the money.

Option 2: Make a partial withdrawal

Another option may be to take some but not all the cash value of your life insurance policy. The benefit here is that you don’t have to surrender your policy, which means your loved ones will still get a death benefit when you die, although probably a smaller one than you intended for them. In this case, check to see whether or not the money you’d receive would be taxable.

Option 3: Borrow money from your life insurance

If you’ve had your life insurance policy for several years, the insurance company may allow you to borrow from your policy’s cash value. In most cases, you won’t have to pay taxes on the money you borrow, but the insurance company will deduct interest payments from your cash value balance. On the plus side, the interest charge can be at a lower rate than you’d pay on a credit card or bank loan, and the loan does not count toward your credit score. If you pay back the loan and interest in full before you die, your loved ones will get the entire death benefit. But if you die before the loan is fully repaid, the balance you owe, plus interest, will be subtracted from the death benefit.

Is cashing out your life insurance policy right for you?

Cashing in or borrowing from your life insurance policy may be an option. But be sure to read over your policy contract to see if and how it works and find out if you will have to pay charges and taxes on the money. If you’re not clear on your options, ask your insurance company representative for help.