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If you’re in need of cash to help cover your bills or pay for an emergency expense, you may be wondering if you can cash out your life insurance policy. Fortunately, you may be able to do so, depending on your policy type. Read on to learn how you can use your cash value to receive funds from life insurance.
What is life insurance cash value?
Cash value is a feature that comes with permanent life insurance policies like whole life and universal life insurance. If you have cash value life insurance, you’ll pay a portion of your premium toward insuring your life and another portion toward building up the cash value. The cash value may earn tax-deferred interest.1
Can you cash out life insurance?
As long as you have a permanent life insurance policy, you may be able to tap into its cash value account. Whole, universal, and variable universal life insurance are all examples of permanent life insurance policies that will cover you for life and allow you to maintain cash value as well as a death benefit.2
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Ways to take out cash from your life insurance policy
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 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 go this route, 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 of cashing out on 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 use the cash value of 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.
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.
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Disclaimer
1 Value Penguin – How Does Cash Value Life Insurance Work? Updated March 31, 2023. https://www.valuepenguin.com/life-insurance/cash-value-life-insurance. Accessed April 4, 2023.
2 Nerdwallet – How to Get Cash from Your Life Insurance Policy. Updated January 25, 2023. https://www.nerdwallet.com/article/insurance/getting-cash-from-life-insurance. Accessed March 31, 2023.
3 Investopedia – Understanding Life Insurance Loans. Updated November 28, 2022. https://www.investopedia.com/articles/personal-finance/121914/understanding-life-insurance-loans.asp. Accessed March 31, 2023.
4 Investopedia – Cashing in Your Life Insurance Policy. Updated May 22, 2022. https://www.investopedia.com/articles/pf/08/life-insurance-cash-in.asp. Accessed March 31, 2023.
Aflac insurance coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
Final Expense Whole Life Insurance is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company.
The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22.
Life – 68000 Series - In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400. Term/Whole Life – B60000 Series – In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Group Whole Life - Q60000 Series - In Arkansas, Policy Q60100CAR. In Delaware, Policy Q60200M. In Idaho Policy Q60100CID. In Oklahoma, Policy Q60100co*k. In Oregon, Policy Q60100COR. In Texas, Policy Q60100CTX. Group Term Life Q60000 Series - In Delaware, Policies Q60200C. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.
The content herein is provided for general informational purposes and is not provided as tax, legal, health or financial advice for any person or for any specific situation. Employers, employees and other individuals should contact their own advisers about their situations. This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY, or VA. Benefits/premium rates may vary based on plan selected. Optional riders may be available at an additional cost. Plans and riders may also contain a waiting period. Refer to the exact plans and riders for benefit details, definitions, limitations and exclusions. For availability and costs, please contact your local Aflac agent/producer. Aflac does not offer universal life insurance.
Aflac’s family of insurers include Aflac, Aflac New York, Continental American Insurance Company, and Tier One Insurance Company.
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