Can I Withdraw Money From My Life Insurance?

Can I Withdraw Money From My Life Insurance?

You may be able to withdraw money from your life insurance policy, but it depends on the kind of coverage you have. There are two major types of life insurance: term and permanent. Term life insurance only provides a death benefit to your beneficiaries after you're gone, and only pays out if you pass away within a certain number of years. It doesn't have a cash value component. However, permanent life insurance has both a cash value and a death benefit.

The cash value of a permanent life insurance policy grows over time as you pay your premiums. If your balance is large enough, you can withdraw money from your policy or borrow funds from the insurer, using your policy as collateral, to pay for expenses while you're alive. But beware that withdrawing money leaves less for your heirs after your death.

How Does Withdrawing From Life Insurance Work?

If you have a life insurance policy with a cash value component, you can access it in several ways while you're alive, including:

• Withdrawing money from the cash value portion
• Surrendering the policy
• Borrowing against the policy
• Using the cash value to pay your premium

4 Ways to Get Cash From Your Life Insurance

Here's a brief overview of common ways you can tap into the cash value your policy has accumulated.

1. Withdraw the Funds

When the cash value of your policy is large enough, you can withdraw part of it just like you would from a bank account and use the money to cover expenses. Since you're withdrawing money you've paid into the account, you generally won't pay taxes on it. However, if you take out more than you've paid in, your withdrawal may be taxed as income.

Pros:

• No restrictions on how you use the money
• Tax-free withdrawals when the amount doesn't exceed the account's cash value

Cons:

• Potential reduced payout for your beneficiaries after your death
• May be subject to partial surrender charges

2. Borrow the Funds

If you want your beneficiaries to receive the policy's full death benefit after you're gone, taking out a loan against your policy may be a better option. When you take out a loan, you borrow money from the insurer, and the cash value of your life insurance policy acts as collateral. There are no credit checks, you can repay the funds when it's convenient and interest rates are usually lower than those charged by other financial institutions.

Pros:

• No credit check or repayment timeline
• Low interest rates

Cons:

• Policy may lapse if the amount you owe is greater than the cash value of the policy
• Reduced death benefit if you don't repay the loan in full before you die

3. Surrender Your Policy

When you surrender your policy, you cancel your coverage and take the surrender value of the policy. The surrender value of a permanent life insurance policy is generally less than the value in your cash account because the insurer typically charges a surrender fee. Surrender fees can be high if you've only had the policy for a short time but generally decrease over time.

Pros:

• No restrictions on use of funds
• Potentially large sum of money

Cons:

• Funds may be taxed if you receive more than you paid into the policy
• No payout for your beneficiaries after your death

4. Apply the Cash Value to Your Premium

Instead of taking money out to cover expenses, you may be able to use the cash value of your policy to pay for part or all of your premiums, freeing up space in your budget for other expenses.

Pros:

• Allows you to keep coverage in place if you're strapped for cash
• Reduces your monthly expenses

Cons:

• Cash value may not be available for other expenses
• Policy may lapse if all funds are used

Alternatives to Cashing Out Life Insurance

Rather than siphoning the cash value of a life insurance policy, consider the following alternatives, which can give you quick access to cash without jeopardizing your coverage.

• Personal loan: Personal loans can provide cash for just about anything and they often have lower interest rates than credit cards—especially if you have good credit. Before applying, check your credit scores to get an idea of the rates and terms you may qualify for, and review your finances to ensure you can afford the monthly payments.
• 0% intro APR credit card: Credit cards with a 0% APR introductory offer can help you avoid paying interest altogether if you pay off your balance before the promotional period expires.
• Credit card cash advance: A cash advance is an expensive loan from your credit card issuer that comes with fees and interest rates that are higher than the card's standard rate. Cash advances can also decrease your credit scores by increasing your credit utilization ratio and probably aren't your best bet if you qualify for other options.
• Home equity loan: Tapping into the equity you've built in your home may help you get a lower interest rate than a personal loan or credit card since your home is collateral. The downside is that you're putting your home at risk if you can't make your payments.

Frequently Asked Questions

• Can I Borrow Against a Life Insurance Policy?

  Whether you can borrow from your life insurance depends on the type of coverage you have. Permanent life insurance typically has a cash value component you can borrow against if the balance is large enough.

• Are Life Insurance Withdrawals Taxable?

  Life insurance withdrawals aren't usually taxable if you withdraw less than you paid in. However, if you withdraw more than you paid into the policy, you may be required to pay taxes.

• Are There Penalties for Cashing Out Life Insurance?

  Yes. If you cash out or surrender your life insurance policy, the provider generally charges a surrender fee. Fees tend to be higher if you've only had your policy for a short time and typically decrease over time.

• How Much Can I Withdraw From My Life Insurance?

  You can typically withdraw up to the amount you've paid into your policy. If you want to withdraw the full amount, you will need to surrender your policy, and you'll no longer have life insurance coverage. You could also make a partial withdrawal, which allows you to maintain your life insurance coverage but decreases the death benefit your beneficiaries receive.

• Should I Withdraw Money From My Life Insurance Policy?

  Withdrawing or borrowing money from your life insurance policy may be a good option if you're in a pinch and need cash for an emergency, but it's probably not a good idea for nonessential spending. Before deciding whether to tap into your policy's cash value or choose another method to get extra cash, consider the pros and cons of each option and evaluate how it may affect your financial future.

The Bottom Line

You can withdraw money from a permanent life insurance policy, but not a term life insurance policy. If you're in need of quick cash, there may be better alternatives to explore that won't put your loved ones' financial health at risk once you're gone.