Life insurance is traditionally thought of as a safety net for beneficiaries after a policyholder’s death. However, what many don’t realize is that some life insurance policies build cash value over time—and that value can be accessed while you're still alive. If you're in need of extra funds or simply want to explore your financial options, it may be time to consider how to cash out life insurance smartly and efficiently.
In this comprehensive 2025 guide, we’ll break down everything you need to know about cashing out your policy: from what it means and how it works, to the different ways to access funds, tax implications, and expert tips for maximizing your policy’s value.
? Want expert guidance? Check out this detailed guide to cashing out life insurance by Insure Guardian for step-by-step advice tailored to your needs.
What Does It Mean to "Cash Out" Life Insurance?
“Cashing out life insurance” refers to withdrawing money from the cash value component of a permanent life insurance policy. Unlike term life insurance, which only offers a death benefit, whole life, universal life, and variable life policies accumulate cash value over time. This value can be tapped into through various methods while the policyholder is still alive.
There are several ways to access this money depending on your financial goals, urgency, and whether you still need life insurance coverage.
Which Policies Allow You to Cash Out?
Before planning to tap into your life insurance, it's important to understand which policies qualify.
✅ Permanent Life Insurance (CASH-OUT POSSIBLE)
Whole Life Insurance: Builds guaranteed cash value. Offers steady, long-term savings.
Universal Life Insurance: Offers flexible premiums and a cash value component.
Variable Life Insurance: Cash value is linked to investment performance; potential for growth or loss.
❌ Term Life Insurance (NO CASH-OUT OPTION)
Offers pure death benefit coverage. No savings or investment component.
Typically less expensive, but cannot be used for cash-out purposes.
If you own a permanent policy, you're likely eligible to cash out depending on how long you’ve owned it and how much value has built up.
How to Cash Out Life Insurance: 4 Proven Methods
Let’s explore the most common methods for accessing the cash value of your policy:
1. Surrendering Your Policy
You cancel your policy in exchange for the accumulated cash surrender value.
Best for: People who no longer need life coverage.
Pros: Full access to available funds.
Cons: You lose all insurance coverage; possible surrender charges; taxable income may apply.
2. Policy Loans
Borrow against your policy’s cash value without canceling it. No credit checks or tax liability if repaid.
Best for: Short-term needs or emergencies.
Pros: Fast, flexible access to funds.
Cons: Accrued interest reduces death benefit if not repaid.
3. Partial Withdrawals
Take out a portion of the available cash value without affecting the full policy.
Best for: Individuals who want to maintain partial coverage.
Pros: Keeps some life insurance protection intact.
Cons: Reduces future death benefit; withdrawals above your premium payments may be taxable.
4. Life Settlement
Sell your policy to a third party for a lump sum. Typically more than the surrender value but less than the death benefit.
Best for: Seniors with high-value policies they no longer need.
Pros: Higher payout than surrendering.
Cons: Involves third-party ownership of your policy; tax implications apply.
Why People Choose to Cash Out Their Life Insurance
The reasons people consider cashing out vary depending on their personal and financial situations:
Cover emergency expenses
Fund retirement or long-term care
Pay off high-interest debt
Invest in business or property
Pay for college tuition or medical bills
No longer need life insurance coverage
Accessing your life insurance cash value can serve as a financial lifeline or a strategic planning tool when done correctly.
Tax Implications of Cashing Out Life Insurance
Taxes are an important factor when considering a cash-out. Here's how it typically works:
Tax-Free Scenarios:
Policy loans are not taxable as long as the policy stays active.
Withdrawals up to the total premiums paid (the cost basis) are tax-free.
Taxable Scenarios:
If your withdrawal exceeds the premiums paid, the excess is taxed as income.
Surrendering the policy for more than your cost basis results in taxable income.
Life settlements are also subject to capital gains and possibly ordinary income tax.
Always consult a tax advisor or financial planner before initiating a cash-out to avoid surprises.
Pros and Cons of Cashing Out Life Insurance
✅ Pros:
Immediate access to cash
No need for bank loan or credit check
Flexible options depending on need
Can reduce financial stress during emergencies
❌ Cons:
Reduces or eliminates your death benefit
May involve taxes or fees
Could affect eligibility for future insurance
Potential loss of a valuable financial safety net
Alternatives to Consider Before You Cash Out
Before surrendering or withdrawing funds from your policy, consider the following alternatives:
1. Accelerated Death Benefit Rider
Some policies allow you to access a portion of your death benefit early if you're terminally ill.
2. Reduced Paid-Up Insurance
Use your cash value to buy a smaller policy that stays in force without future premiums.
3. Using Dividends
If you have a participating whole life policy, dividends can be used for income without reducing the death benefit.
4. Borrow from Other Assets
If you have IRAs, home equity, or brokerage accounts, compare the cost of using those funds first.
Real-Life Scenarios: When Cashing Out Makes Sense
Let’s explore two real-world examples:
Case 1: Retirement Supplement
Robert, 65, owns a whole life policy with $45,000 in cash value. He decides to withdraw $20,000 to supplement his fixed retirement income and leave the rest intact for his heirs.
Case 2: Business Opportunity
Karen, 50, wants to start a home-based business. She takes a policy loan of $30,000 against her universal life policy. Her business becomes profitable, and she repays the loan within 5 years—with her death benefit fully restored.
How to Start the Process
Ready to explore your options? Follow these steps:
Review your policy – Check cash value, terms, and surrender charges.
Speak with your insurer – Ask for policy illustrations and cash-out estimates.
Consult a financial advisor – Understand tax implications and long-term impact.
Make a plan – Choose the option that aligns with your needs and goals.
? Need help making the right decision? Visit Insure Guardian’s guide for personalized advice and in-depth resources.
Final Thoughts
Cashing out your life insurance can be a powerful financial move—when done strategically. Whether you're planning for retirement, handling a financial emergency, or reevaluating your insurance needs, knowing your options can make all the difference.
But remember: cashing out isn't without its trade-offs. Always weigh the long-term impact on your financial security and your family’s future before making a decision.
Explore your options with confidence—your life insurance policy might be more valuable than you think.
