How to Cash Out Life Insurance: What You Need to Know in 2025

Life insurance is often viewed as a safety net for your loved ones, but did you know that some policies can also serve as a financial asset during your lifetime? Many policyholders are surprised to learn they can cash out life insurance under certain conditions—giving them access to much-needed funds for emergencies, retirement planning, debt repayment, or investment opportunities.

If you’re wondering how to access the value of your policy, this in-depth guide explains everything you need to know about cashing out life insurance in 2025—how it works, your options, tax implications, pros and cons, and the smartest ways to do it.

👉 For a full expert guide on cashing out your life insurance, visit Insure Guardian’s complete breakdown here.

What Does It Mean to Cash Out a Life Insurance Policy?

Cashing out life insurance means accessing the cash value accumulated in a permanent life insurance policy, such as whole life, universal life, or variable life insurance. Unlike term policies, these permanent policies come with a savings component that grows over time, tax-deferred.

Policyholders can use this built-up value in several ways:

• Withdraw funds

• Take a loan against it

• Surrender the policy entirely

The ability to cash out depends on the type of policy, the terms of your contract, and how long you’ve held the policy.

Types of Life Insurance You Can Cash Out

Not all life insurance policies are eligible for cashing out. Here’s a breakdown:

✅ 1. Whole Life Insurance

This policy builds guaranteed cash value over time and pays a fixed interest rate. It’s one of the most common types used for cash-outs.

✅ 2. Universal Life Insurance

This flexible policy allows you to adjust premiums and death benefits while building cash value at a variable interest rate.

✅ 3. Variable Life Insurance

Cash value is invested in sub-accounts like mutual funds, offering higher growth potential but also more risk.

❌ 4. Term Life Insurance

Cannot be cashed out because it has no cash value—only a death benefit if you pass away during the term.

3 Main Ways to Cash Out Life Insurance

1. Surrendering the Policy

This means you terminate the policy entirely in exchange for its cash surrender value.

Pros:

• Full access to accumulated funds

• No obligation to repay

Cons:

• Loss of life insurance coverage

• Surrender charges may apply

• Taxable income if withdrawals exceed premiums paid

2. Policy Loan

Borrow against your policy’s cash value. It’s tax-free as long as the policy stays active.

Pros:

• Keep the policy active

• No credit check required

• Lower interest rates than personal loans

Cons:

• Interest accrues over time

• Reduces death benefit if unpaid

3. Partial Withdrawal

Take out a portion of your cash value without fully surrendering the policy.

Pros:

• Partial access to funds

• Keeps some death benefit intact

Cons:

• Reduces policy’s cash value and death benefit

• May have tax implications

When Should You Consider Cashing Out Life Insurance?

While cashing out can provide short-term relief or funding for opportunities, it’s not always the right move. You might consider cashing out if:

• You no longer need coverage (e.g., your children are financially independent).

• You’re facing a financial emergency.

• You need to supplement retirement income.

• You want to invest in a business or property.

• You want to pay off high-interest debt.

However, if your policy serves as your only life insurance, you should think twice before surrendering it completely.

Tax Implications of Cashing Out Life Insurance

Cashing out isn’t always tax-free. Here’s what to consider:

• Policy loans are generally not taxable unless the policy lapses or is surrendered.

• Withdrawals are tax-free up to the amount you paid in premiums (called the “basis”).

• Any amount above your premium payments is considered taxable income.

• If you surrender the policy and there’s a gain, it’s taxable as ordinary income.

• Some states may impose additional taxes on gains.

It’s highly recommended to consult with a financial advisor or tax specialist before making a decision.

Pros and Cons of Cashing Out Life Insurance

✅ Pros:

• Immediate access to funds

• No need for credit approval

• Flexible withdrawal and loan options

• Can supplement retirement income

❌ Cons:

• Reduces or eliminates death benefit

• Potential tax liabilities

• Possible surrender charges

• Loss of long-term security for your beneficiaries

Alternative Options to Consider Before Cashing Out

Before surrendering your life insurance policy, consider these alternatives:

1. Accelerated Death Benefit

If you’re terminally ill, some policies allow you to access part of your death benefit early.

2. Life Settlement

Sell your life insurance policy to a third party for more than the cash surrender value (but less than the death benefit).

3. Reduced Paid-Up Insurance

Keep a smaller death benefit with no future premiums using your policy’s cash value.

Frequently Asked Questions

Can I cash out my life insurance policy early?

Yes, but only if it’s a permanent policy that has built up sufficient cash value. Term policies cannot be cashed out.

How much money can I get when I cash out?

This depends on your policy type, duration, premium payments, and market performance (for variable life insurance).

Is cashing out life insurance worth it?

It can be, especially if you no longer need coverage or need immediate funds. However, it should be a carefully considered decision.

Do I pay taxes when I cash out life insurance?

Potentially. You won’t pay taxes on the amount equal to your premiums, but anything beyond that may be taxable.

How do I start the process?

Contact your insurance provider or consult a financial advisor. Or start your journey with expert guidance at Insure Guardian.

Final Thoughts

Cashing out a life insurance policy is a powerful option—when used wisely. Whether you’re navigating a financial emergency or planning a more comfortable retirement, your policy’s cash value can be a hidden lifeline.

But it’s not a one-size-fits-all solution. Weigh the benefits, understand the tax rules, and consider the long-term implications for your loved ones before making the decision.

👉 Need professional help to decide if cashing out your life insurance is right for you? Visit Insure Guardian’s expert guide for insights, options, and free advice tailored to your situation.