Can I Cash Out a Life Insurance Policy?

Ways to cash out life insurance

There are several ways you can use the cash value from your life insurance policy while you're still alive, including:

Borrow from your policy

Depending on the specifics of your life insurance policy, you may be able to take out a loan against the cash value. Since there is no credit check involved and the repayment terms are flexible, you may find it easier to get a loan from your insurance policy than from a bank, credit union, or online lender. If you cash out life insurance this way, keep in mind that any amount you owe on the loan will be deducted from the death benefit.

Withdraw funds from your policy

You may also be able to withdraw a portion of your policy's cash value. In many cases, you won't owe income tax on any withdrawals you make up to the amount of premiums you've already paid. However, any amount you withdraw that exceeds what you've already paid will likely be taxed.

Surrender your policy

If you decide to surrender your policy, you withdraw its entire cash value. This will end your coverage, and your beneficiaries will no longer be owed a death benefit when you pass away. In addition, you might be on the hook for a surrender charge or owe income taxes if your payout is higher than the premiums you paid.

Pay policy premiums using your cash value

Your cash value can help you out if you need money to pay your life insurance premiums. You may use it to cover out-of-pocket premium payments. This option might come in handy if you're struggling financially.

Pros and cons to cashing out life insurance

The most noteworthy benefits and drawbacks of cashing out your life insurance policy are as follows:

Pro: Receive quick funds

You won't have to go through an extensive application process or a long waiting period to collect your money. Life insurance loans offer quick funding because there is no application or credit check. The cash value in your account acts as collateral on the loan, and you can take advantage of it once you've built up enough.

Pro: Low interest rates on loans

Typically, you can lock in a low interest rate on a cash value loan. Depending on your policy, this may be anywhere from 5% to 8%.³ These interest rates are much lower than rates on many credit cards and personal loans.

Con: Reduce or eliminate your cash value

If you cash out your life insurance policy, you'll lower your cash value or get rid of it altogether. Plus, any loan amount you don't repay will be deducted from the death benefit.

Con: Your policy could lapse

When you pay back a life insurance policy loan, you will face interest charges. In the event you borrow a significant amount and your interest exceeds your cash balance, your policy might lapse, and your insurance company may close it. You will then be stuck with a hefty tax bill.

Do you pay taxes when cashing out a life insurance policy?

Fortunately, you won't have to pay taxes if you withdraw up to the amount of the total premiums you paid into the policy. However, if you withdraw any gains or dividends on the policy, these amounts may be taxed as ordinary income.⁴

Should I cash out my life insurance policy?

If you need to borrow funds for short-term needs, like a home improvement project or wedding, it may make sense to cash out your life insurance policy. This is particularly true if you're confident you can pay back the loan and don't mind a smaller death benefit for your beneficiaries.

Alternatives to cashing out a life insurance policy

If cashing out life insurance isn't right for you, here are some alternatives to consider:

• Get a personal loan: You can borrow a lump sum of money from a bank or financial institution, usually with fixed repayment terms and interest rates. This option is less risky but may have higher interest rates compared to secured loans.


• Take out a home equity loan: A home equity loan is secured by the equity in your home, offering a lump sum with potentially lower interest rates. This option requires significant home equity and puts your home at risk if you can't repay the loan.


• Borrow from your retirement accounts: You can consider tapping into 401(k) or IRA funds, often with penalties and taxes if you're under a certain age. This can impact your retirement savings but provides quick access to funds.

Learn more about cash value life insurance

Aflac offers whole life insurance that comes with cash value. You can reap the benefits of the cash value component while you’re still living, whether you want to withdraw funds or get a loan. If you're interested in a whole life insurance policy with cash value, get a quote today.