Wondering Whether You Can Access Cash From Your Life Insurance? Here's What You Should Know

When it comes to unlocking funds from your life insurance policy, the answer depends on which type of coverage you hold. While many policyholders don’t realize they have options, certain policies do allow you to access accumulated value—though understanding the trade-offs is critical before proceeding.

Which Types of Coverage Allow Cash Withdrawals?

Not all life insurance policies are created equal when it comes to liquidity. Whole and universal life insurance plans are structured to build cash value over time, creating a reserve that policyholders may eventually tap into. These policies offer flexibility: you can withdraw portions of your accumulated funds, use them as collateral for loans, or surrender the policy entirely.

Conversely, term life insurance operates differently. These temporary policies maintain no cash reserves—they’re purely protection-focused. If you own term coverage, you cannot withdraw money from your life insurance, making this option unavailable for that policy type.

A critical consideration: If your primary reason for purchasing a policy is the ability to cash out later, explore alternative investments first. The stock market historically delivers superior returns compared to most life insurance products.

Your Options for Accessing Policy Funds

There are three main pathways to retrieve money from qualifying policies:

Option 1: Direct Withdrawal of Accumulated Cash

Most cash-value policies permit you to extract funds directly from your reserves. The first layer of withdrawals often comes tax-free, but this privilege has limits and consequences.

Once withdrawals exceed certain thresholds, the IRS treats excess amounts as taxable income. Additionally, tapping your cash reserves can trigger higher monthly premiums or reduce the death benefit your beneficiaries ultimately receive. The insurance company may also assess fees for excessive withdrawals.

Option 2: Borrowing Against Your Policy’s Value

Rather than withdrawing, many policyholders choose to take loans secured by their policy’s cash reserves. The amount you’re eligible to borrow correlates directly with how much cash value you’ve accumulated—the longer you’ve paid premiums and the larger your reserves, the greater your borrowing capacity.

Two important caveats apply: you’ll likely owe interest on borrowed funds, and any outstanding loan balance reduces your beneficiaries’ payout upon your death. This can be disadvantageous if your family depends on that full death benefit.

Option 3: Surrendering Your Policy Completely

Canceling your policy unlocks the full accumulated cash value, giving you complete access to all accumulated reserves. However, this action is permanent—your insurer will no longer pay beneficiaries upon your passing, and reactivating the same policy later becomes significantly harder.

The full surrender amount is subject to income tax, and insurers frequently impose cancellation fees that eat into your proceeds.

Comparing Your Withdrawal Strategies

Withdrawals and policy loans offer preservation benefits: Both methods keep your death benefit intact, meaning your beneficiaries still receive their expected payout if something happens to you. Additionally, these routes may qualify for favorable tax treatment.

Full surrender provides maximum access: If you need the total value of your account right now, this is the only method that delivers your entire cash reserves.

If preserving your death benefit matters to you while still accessing emergency funds, consider alternatives like personal loans with competitive rates or funds from an existing emergency account. These won’t diminish your coverage or affect your family’s financial security.

Before deciding how—or whether—to tap your policy, review your complete financial picture and long-term objectives. Examine your monthly budget and future needs carefully. While cashing out might solve an immediate problem, ensure you’ve weighed every available option first.