How to Cash Out Life Insurance in 2026 7 Fast Steps

Understanding What “Cashing Out Life Insurance Policy” Really Means

Cashing out life insurance policy is a phrase that can describe several different actions, depending on the type of coverage you own and the benefits built into it. For many people, the idea sounds straightforward: you have a life insurance policy, you need funds, so you “cash it out.” In practice, however, the options range from surrendering a permanent policy for its cash value, to taking a policy loan against accumulated value, to selling a policy through a life settlement, to withdrawing a portion of the cash value while keeping some coverage in force. Each route has different consequences for taxes, beneficiaries, long-term coverage, and even eligibility for certain public benefits. Understanding the exact meaning matters because a decision that looks like a quick fix can permanently change the financial protection you intended to leave behind.

The type of insurance is the biggest factor. Term life insurance generally does not build cash value, so “cashing out” a pure term policy is usually not possible unless it has a special return-of-premium feature or a conversion option that leads to permanent coverage with value. Permanent life insurance—such as whole life, universal life, indexed universal life, and variable universal life—can build cash value over time. That cash value is not the same as the death benefit, and accessing it can reduce the amount paid to beneficiaries, increase future costs, or cause the policy to lapse if not managed carefully. Cashing out life insurance policy by surrender typically ends coverage altogether, while loans and withdrawals can keep coverage active if the remaining values and premiums support it. Before taking action, it helps to clarify what you want: immediate cash, lower premiums, continued coverage, or a combination of those goals.

Policy Types and How Cash Value Works

Whether cashing out life insurance policy is even on the table depends on how the policy is designed. Whole life policies are built around guaranteed premiums, a guaranteed death benefit, and a cash value schedule that grows over time, often supported by dividends if the insurer is mutual and the policy is eligible. Universal life policies are more flexible, with cash value tied to credited interest and policy charges; you can often adjust premiums and, in some cases, the death benefit. Indexed universal life ties interest crediting to an external index subject to caps and participation rates, while variable universal life allows cash value to be invested in subaccounts with market risk. The common thread across permanent insurance is that a portion of your premium goes toward policy expenses and the cost of insurance, and the remainder is allocated to cash value, which may grow based on guarantees, credited rates, or market performance.

Cash value is an internal account value, not a separate bank account. When you request money, the insurer is either paying you from that value (withdrawal), lending against it (loan), or paying out the policy’s net surrender value (surrender). Net surrender value usually equals the cash value minus surrender charges and any outstanding loans, plus or minus other adjustments. Early in a policy, surrender charges can be significant, so cashing out life insurance policy soon after purchase can yield less than expected. Over time, charges generally decline and cash value becomes more accessible. Another important detail is that cash value growth can be tax-deferred under U.S. rules when the policy is structured properly, but the tax treatment changes if you withdraw more than your cost basis, if the policy becomes a Modified Endowment Contract (MEC), or if you surrender the contract. Knowing the policy type and how it accumulates value is essential before you decide how much to access and by which method.

Surrendering the Policy for Cash: What Happens Step by Step

Surrender is the most literal version of cashing out life insurance policy: you terminate the coverage and request the surrender value from the insurer. The process typically begins with contacting the carrier or your agent to request surrender paperwork, reviewing the current illustration or in-force ledger, and confirming the amount you would receive after surrender charges and any loan payoff. You may need to submit identification, a signed request, and banking details for an electronic transfer or mailed check. Once processed, the policy ends, the death benefit is no longer in effect, and beneficiaries lose the protection the policy provided. If you later want life insurance again, you may have to reapply, and a new policy could be more expensive due to age, health changes, or underwriting outcomes.

The financial impact of surrender can be larger than the check you receive. If the policy is permanent and you have paid premiums over many years, your cost basis is generally the total premiums paid minus any prior tax-free withdrawals. If your surrender proceeds exceed your cost basis, the gain may be taxable as ordinary income. If the policy is a MEC, taxation can be even less favorable, and withdrawals or loans may be treated differently. Surrender can also affect planning that relied on the policy, such as covering final expenses, supporting a spouse, or funding a buy-sell agreement. For people who are cashing out life insurance policy due to budget pressure, it can be worth exploring alternatives like reducing the death benefit, switching to a paid-up option, using dividends to offset premiums, or taking a partial withdrawal. Surrender can be appropriate in some cases, but it should be treated as a last-resort decision because it is usually irreversible.

Withdrawing Cash Value Without Fully Canceling Coverage

A partial withdrawal is another approach to cashing out life insurance policy, and it can be less disruptive than surrender if your goal is to access some cash while keeping coverage in place. Not all policies handle withdrawals the same way. Many universal life policies allow partial withdrawals, typically subject to minimum amounts and administrative fees, and the withdrawal can reduce the cash value and, in some designs, reduce the death benefit. Whole life policies may allow withdrawals through partial surrenders of paid-up additions or other riders, though the mechanics vary. The key idea is that you are taking a portion of the value out of the contract, which can lower future growth potential and may require higher ongoing premiums to keep the policy from lapsing, especially in universal life where charges continue monthly.

Tax treatment depends on the policy classification and how much you take. In many non-MEC policies, withdrawals are generally treated as a return of basis first, which can be tax-free up to the amount of premiums paid. Amounts above basis may be taxable. In a MEC, withdrawals are often taxed as earnings first and can trigger a 10% penalty if you are under a certain age, similar to retirement account rules. When considering cashing out life insurance policy via withdrawal, it is important to request an in-force illustration showing the impact on future policy performance: how long coverage is projected to last, whether premiums need to increase, and how the reduced cash value affects policy charges. A withdrawal may preserve some death benefit, but it can also weaken the policy’s ability to sustain itself, especially if credited rates are lower than expected or if the policy is older and insurance costs have increased.

Taking a Policy Loan: Accessing Cash While Keeping the Policy

A policy loan is often marketed as a flexible way of cashing out life insurance policy without triggering immediate taxes, because you are borrowing from the insurer with the cash value as collateral rather than taking a distribution. Loan availability depends on the policy’s loan provisions and how much value has accumulated. Typically, you can borrow up to a percentage of the cash value, and interest accrues on the outstanding loan balance. Some policies offer “fixed” loan rates, while others offer “variable” rates or “participating” loans where the borrowed portion may still receive some form of crediting. The appeal is speed and simplicity: no credit check, no income verification, and repayment schedules may be flexible.

Policy loans are not free money, and they can create long-term risks. If you do not repay the loan, the balance and accrued interest reduce the death benefit paid to beneficiaries. More critically, large loans can cause a lapse if the cash value becomes insufficient to cover policy charges and loan interest. A policy lapse with a loan can trigger an unexpected tax bill because the IRS may treat the unpaid loan as a distribution to the extent it exceeds basis. That surprise taxation is one of the most common hazards for people cashing out life insurance policy through loans, especially in universal life where the policy’s internal costs can rise with age. Before borrowing, it helps to ask for projections showing how the loan affects policy longevity under different credited rates and repayment assumptions. If you can commit to at least paying loan interest or making periodic repayments, a loan can be a controlled way to access funds while maintaining a meaningful death benefit.

Life Settlements and Viatical Settlements: Selling the Policy for Cash

Another form of cashing out life insurance policy is selling it to a third party through a life settlement. In a life settlement, an investor buys the policy, becomes the new owner and beneficiary, pays ongoing premiums, and collects the death benefit when the insured dies. This option is generally available for older policyholders or those with health conditions that shorten life expectancy, though eligibility criteria vary by state and provider. The amount offered is typically more than the surrender value but less than the death benefit, because the buyer needs room for premiums, time value of money, and profit. A viatical settlement is a related concept, often involving individuals with a terminal illness, and may have different consumer protections and tax treatment.

Selling a policy can provide a larger cash payout than surrender, but it comes with tradeoffs. You give up the death benefit for your family, and your medical and personal information will likely be reviewed by buyers and tracking services over time. The transaction also involves broker or provider fees, and the market pricing can vary widely. Taxation can be complex: part of the proceeds may be treated as a return of basis, part as ordinary income, and part as capital gain, depending on the policy and the amount received. Anyone cashing out life insurance policy via settlement should compare multiple offers, confirm licensing and consumer protections in their state, and consider whether alternatives—like reducing coverage, using accelerated death benefits, or taking a loan—could meet the same need with fewer privacy and legacy impacts. For some, especially those who no longer need coverage and want to fund care costs, a settlement can be a rational choice when handled with strong due diligence.

Tax Consequences and Reporting Considerations

Taxes are often the deciding factor in whether cashing out life insurance policy is worth it. While life insurance death benefits are typically income-tax-free to beneficiaries, accessing cash value during life can create taxable income depending on how you do it. A full surrender can produce taxable gain if the cash received exceeds your cost basis. Partial withdrawals can be tax-free up to basis in many non-MEC policies, but above-basis amounts may be taxable. Policy loans are generally not taxable when taken, but they can become taxable if the policy lapses or is surrendered with an outstanding loan. If the contract is a Modified Endowment Contract, withdrawals and loans can be taxed as earnings first and may be subject to an additional penalty if the insured is under the applicable age threshold.

Paperwork matters because insurers may issue tax forms such as Form 1099-R when there is a taxable distribution. The taxable amount might not match the cash you received if a loan is treated as distributed at lapse or surrender. State taxes may also apply. For those cashing out life insurance policy through a life settlement, tax treatment can involve multiple layers, and the settlement provider may issue reporting documents depending on the transaction. Because policy history can include dividends, paid-up additions, prior withdrawals, and loan activity, calculating basis is not always simple. It can be helpful to request a cost basis statement from the insurer and keep premium payment records. If the amount is significant, coordinating with a tax professional can prevent unpleasant surprises and can help you evaluate whether a different method—loan versus withdrawal versus surrender—produces a better after-tax result.

Impact on Beneficiaries, Estate Planning, and Long-Term Goals

Cashing out life insurance policy can ripple through an entire financial plan, especially when the policy was intended to protect dependents, pay off a mortgage, replace income, or cover estate taxes. When you surrender or sell a policy, the death benefit is gone. When you withdraw or borrow, the death benefit may shrink or become vulnerable if the policy later lapses. If your beneficiaries rely on that payout, you may need to replace the coverage with term insurance or another permanent policy, which may not be affordable or obtainable depending on age and health. Even if dependents are grown, the policy might have been earmarked for final expenses, charitable gifts, or equalizing inheritances among heirs.

There can also be estate planning implications. If the policy is owned by an irrevocable life insurance trust (ILIT), cashing out life insurance policy is not a simple personal decision; it may require trustee action and must follow the trust terms. If you are considering surrender in a situation involving business planning, such as key-person insurance or buy-sell funding, removing the policy could undermine agreements and create liquidity issues for partners or heirs. For retirees, some permanent policies are used as part of a tax strategy or as a reserve asset; taking too much too fast can reduce flexibility later. Before making changes, it helps to restate the original reason the coverage was purchased and compare it to your current needs. If the need has truly disappeared and the costs are burdensome, cashing out may fit. If the need remains but cash is tight, reducing coverage or restructuring premiums may preserve the core protection.

Common Reasons People Cash Out and Smarter Alternatives

People consider cashing out life insurance policy for many reasons: job loss, medical bills, debt consolidation, helping family members, funding education, or covering retirement expenses. Sometimes the motivation is dissatisfaction with policy performance, especially if projected values did not materialize due to lower interest rates or market volatility. In other cases, the policy was purchased for a need that no longer exists, such as income replacement for young children who are now financially independent. While these motivations are understandable, the most costly outcomes often happen when the decision is rushed and the policy is surrendered without exploring adjustments that could preserve some value and coverage.

Alternatives can include reducing the face amount to lower premiums, switching from a level death benefit to an increasing or vice versa depending on the product, using accumulated dividends to pay premiums, or electing a reduced paid-up option in whole life that keeps a smaller permanent death benefit with no further premium obligation. Some universal life policies can be “refinanced” in a sense by adjusting premiums, death benefits, or riders to improve sustainability. If the need is short-term liquidity, a policy loan or partial withdrawal may be less destructive than surrender, provided it is managed to avoid lapse. For those who only need coverage temporarily, converting a permanent policy strategy into term coverage may be possible by buying new term insurance and then deciding whether to keep the permanent policy. Anyone cashing out life insurance policy should also compare the effective cost of accessing funds through the policy versus other options like home equity lines, personal loans, or adjusting discretionary spending, because life insurance is often a long-term asset that is expensive to rebuild once surrendered.

Costs, Fees, and Timing: Why the Payout May Be Less Than Expected

A frequent surprise when cashing out life insurance policy is that the amount available can be lower than the cash value shown on a statement. Policies may have surrender charges, particularly in the first 5 to 15 years, designed to recoup acquisition costs. Even beyond surrender charges, there may be administrative fees, market value adjustments in some interest-sensitive policies, and loan interest that reduces net proceeds if you have borrowed previously. For variable life policies, cash value can fluctuate with market performance, and selling investments to fund a withdrawal might lock in losses during a downturn. Timing matters: requesting a payout right before a dividend is credited or an interest credit is applied can change the numbers, and insurers may process transactions on specific business cycles.

It is also important to distinguish between “cash value,” “accumulation value,” and “net surrender value,” as terminology differs by carrier. When planning cashing out life insurance policy, request a current in-force illustration or ledger that shows the exact surrender value as of a specific date and the projected values if you wait several months. If you are near the end of a surrender charge period, delaying could materially improve your net payout. Conversely, if the policy is underperforming and at risk of lapse, waiting without adjusting premiums could make things worse. For those using loans, the timing of interest accrual and the method of compounding can affect the trajectory of the loan balance. The best approach is to get exact figures in writing, understand which fees apply, and decide based on net proceeds and future protection needs rather than on a headline cash value number that may not reflect what you will actually receive.

How to Evaluate Your Policy Before You Take Money Out

A careful evaluation can prevent avoidable mistakes when cashing out life insurance policy. Start by identifying the policy type, issue date, death benefit, current cash value, net surrender value, premium schedule, and whether the policy is a MEC. Review any riders such as waiver of premium, accelerated death benefit, long-term care or chronic illness riders, and guaranteed insurability options. These add-ons can be valuable and may be difficult or expensive to replace later. Next, clarify ownership and beneficiary structure. If the policy is owned by a trust, a business, or jointly with a spouse, you may need additional authorization to make changes. Also confirm whether there are outstanding loans, because they change both net proceeds and tax risk.

Then request an in-force illustration showing multiple scenarios, such as current assumptions and a more conservative crediting rate. This is especially important for universal life and indexed universal life, where performance assumptions can materially change how long the policy stays in force. If you are considering a loan, ask for a projection showing the policy’s status with the loan outstanding and with various repayment patterns. If you are considering surrender, ask for the taxable gain estimate and whether any surrender charges remain. For those cashing out life insurance policy because premiums feel unaffordable, ask the insurer about reduced paid-up options, extended term options, or lowering the face amount. Comparing these paths side by side makes the tradeoffs visible: immediate cash versus ongoing protection, taxes now versus later, and the probability of lapse. A structured evaluation is also the best way to avoid the common trap of taking a loan that quietly grows until the policy collapses.

Practical Steps to Cash Out Safely and Avoid Scams

Executing cashing out life insurance policy should be handled through official channels to reduce delays and reduce fraud risk. Contact the insurer using the phone number on your statement or the carrier’s official website, not a number provided in an unsolicited message. Ask for the exact forms needed for surrender, withdrawal, or loan, and confirm signature requirements and notarization rules. If you work with an agent or advisor, ask them to provide an in-force illustration and a written summary of how the transaction affects death benefit, premiums, and policy duration. Keep copies of all documents submitted and request written confirmation once the transaction is completed. If you are changing bank details or mailing addresses, verify changes through a secure process because life insurance transactions can be targeted by identity thieves.

Extra caution is warranted with life settlements and viatical settlements. Only work with properly licensed providers or brokers in your state, and insist on a detailed disclosure of fees, commissions, and privacy practices. Compare multiple bids; pricing can differ significantly. Understand that selling a policy means future contact from parties tracking the insured’s health status, and ensure you are comfortable with that. If you are cashing out life insurance policy due to financial stress, be wary of high-pressure tactics that push surrender without explaining alternatives like reduced paid-up coverage or premium restructuring. Also be cautious of anyone promising “tax-free” outcomes without reviewing MEC status, basis, and potential lapse risks. When the amounts are meaningful, coordinating with a tax professional and, if applicable, an estate planning attorney can ensure the transaction aligns with your broader goals and does not accidentally create a tax problem or violate trust terms.

Balancing Immediate Cash Needs With Long-Term Protection

The hardest part of cashing out life insurance policy is balancing today’s need for liquidity with tomorrow’s need for protection. A policy can represent years of planning and premium payments, and it may be one of the few financial tools designed to deliver cash exactly when a family is least able to earn it—after a death. At the same time, real life brings emergencies: caregiving costs, medical deductibles, layoffs, and unexpected repairs. When those pressures hit, the cash value can feel like a lifeline. The goal is to access funds in a way that does the least damage to your financial resilience. Often that means taking the smallest amount necessary, choosing the method with the lowest long-term risk, and setting guardrails so the policy does not quietly unravel later.

For some households, the best compromise is a controlled loan with a plan to repay interest, paired with a review of the policy annually. For others, a partial withdrawal combined with a reduction in death benefit can keep the coverage sustainable. If the policy is no longer needed, surrender or a life settlement may be appropriate, especially if the net proceeds will meaningfully improve quality of life or reduce high-interest debt. The right answer depends on health, age, dependents, other assets, and whether you can replace coverage if needed. The final decision about cashing out life insurance policy should be made with clear numbers: net cash received, taxes due, remaining coverage, and the probability the policy stays in force. When those details are understood, you can choose a path that meets immediate needs without sacrificing more long-term security than necessary.

Watch the demonstration video

This video explains how cashing out a life insurance policy works, including which types may build cash value, the steps to withdraw or surrender a policy, and how payouts are calculated. You’ll also learn about potential fees, taxes, and how cashing out could affect your coverage and beneficiaries. If you’re looking for cashing out life insurance policy, this is your best choice.

Benjamin Cooper

cashing out life insurance policy

Benjamin Cooper is a financial analyst and insurance technology writer specializing in life insurance calculators and digital planning tools. With expertise in actuarial models, cost simulations, and user-friendly financial software, he helps readers understand how to project coverage needs and premiums with accuracy. His guides emphasize clarity, transparency, and practical use of online calculators to simplify complex life insurance decisions.