Can I Cash Out a Life Insurance Policy?

How to cash out a life insurance policy

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

Borrowing from your policy

Depending on your life insurance policy, you may be able to take out a loan against the cash value. Since there's no credit check and repayment terms are flexible, a policy loan may be easier to access than a traditional loan. Just keep in mind that any unpaid loan amount will be deducted from the death benefit.¹

Withdrawing funds from your policy

You may be able to withdraw part of your policy's cash value. In many cases, you won't owe income tax on withdrawals up to the amount of premiums you've already paid. However, withdrawals above that amount will likely be taxed.¹

Surrendering your policy

When you surrender your policy, you withdraw its entire cash value and end your coverage. As a result, your beneficiaries will no longer receive a death benefit when you pass away. You may also owe surrender charges or income taxes if your payout is higher than the premiums you paid.¹

Paying policy premiums using your cash value

You may be able to use your cash value to help cover life insurance premiums if you need to reduce out-of-pocket payments.⁴

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

Life insurance loans can offer quick funding because there's no application or credit check. The cash value in your account acts as collateral once you've built up enough.

Pro: Low interest rates on loans

You may be able to lock in a lower interest rate on a cash value loan than you'd find with many credit cards or personal loans. The average interest rate on a cash value loan may range from 5% to 8%, depending on your policy.⁵

Con: Reduce or eliminate your cash value

If you cash out your life insurance policy, you'll lower or eliminate your cash value. Plus, any unpaid loan amount will be deducted from the death benefit.

Con: Your policy could lapse

If you borrow a significant amount and interest exceeds your cash balance, your policy could lapse. This may leave you without coverage and create a tax bill.

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

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.⁶

Should I cash out my life insurance policy?

If you need funds for short-term needs, you may consider cashing out your life insurance policy. It can be a good option if you're confident you can pay back the loan and don't mind leaving 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 money from a bank or financial institution, usually with a fixed interest rate and repayment term.
• Take out a home equity loan: A home equity loan may offer a lower interest rate than a personal loan, but it uses your home as collateral.
• Borrow from your retirement accounts: You may be able to access 401(k) or IRA funds, but penalties, taxes and long-term retirement impacts may apply.

Learn more about Aflac's cash value life insurance

Aflac offers whole life insurance that comes with cash value. You can reap the benefits of this cash value component while you're still alive, whether you want to withdraw funds or get a loan.

If you're interested in a whole life insurance policy with cash value, chat with an Aflac agent and get a quote today.

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