Collect on Your Life Insurance Policy While Still Alive

If you need cash in the short term and don’t mind giving up long-term advantages, considering cashing in on your policy may make sense.

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Do you need a quick infusion of potentially tax-free cash? If you have the correct type of insurance policy, you may be able to access funds from it while you’re still alive.

But what type of insurance policy do you need? There are several types and ways to collect funds from your insurance policy.

Types of Insurance Policies You Can Use for Cash

With one exception, only permanent insurance policies can be used for cash while you’re still alive. These include whole life insurance and universal life insurance.

According to U.S. News, whole life insurance pays a death benefit no matter when you die. There is no set life of the policy. Whole life also accrues cash value that grows over time. This type of life insurance has higher premiums than a term life policy would.

Universal life insurance policies have an investment function and flexible premiums, according to Aflac. These types of policies have premiums that change over time. Therefore, it’s essential to understand your long-term goals when purchasing one.

Term life policies aren’t permanent and don’t build cash value. They are only in force between 10 and 30 years and don’t typically provide a vehicle for cash before the death benefit. But there is an exception: When you purchase the policy, you can add riders at an additional premium, which will give you restricted use of the policy before death.

Some term life policy benefits are free, like a terminal illness death benefit rider. Other benefits come at an added cost. For example, the long-term care rider allows you to claim money for medical care if you qualify. You should discuss these riders before purchasing the policy. You can’t add them later once the policy is in force.

Four Ways to Access Life Insurance Funds Before Death

A permanent life insurance policy usually comes with a cash value component. The cash value represents the tax-deferred growth the policy accumulates over time.

With every premium you pay, the cash value increases. There are four ways to withdraw money. Your financial needs will determine which method is best for you.

Regardless of which method you choose, the accumulated cash value on your policy will determine the amount of cash you can withdraw.

Withdraw Money From Policy

When a cash value has accumulated on your permanent life insurance policy, you'll have the option of withdrawing the accrued money.

But withdrawing the funds will reduce the amount of interest you’ll be able to earn on the cash value. It will also reduce the amount of money you’ll be able to leave to beneficiaries.

You can only withdraw the accumulated cash value. You cannot withdraw the total death benefit amount. In other words, you can’t withdraw more money than the policy has accumulated in cash value.

For example, if you have a $500,000 life insurance policy that has accumulated $2,000 in cash value, the maximum amount you’ll be able to withdraw is $2,000. You are not eligible to withdraw the full $500,000.

Request a Loan From Policy

You can take out a loan through your life insurance policy. However, just like the withdrawal, the loan amount cannot exceed the policy’s cash value. You'll also have to pay interest on the loan.

But in contrast to a personal loan from a financial institution, you won’t have to go through an application process or a credit check. But you still must repay it.

If you die before you pay the loan back, the amount owed, including interest, will be deducted from the death benefit.

Surrender Life Insurance Policy

If you surrender your life insurance policy, you‘ll lose your insurance coverage. Surrendering means giving up your insurance policy, giving up your beneficiaries’ death benefit. Instead of this coverage, you’ll receive the total amount of the cash value minus any fees or penalties.

Some people surrender because they can no longer make premium payments. It’s wise to contact a financial adviser to explore if this is right for your circumstances.

Sell Life Insurance Policy

There are companies—you may have seen advertising on television—that will buy your life insurance policies. They pay you a percentage of the death benefit.

The companies then own your policy and pay the premium until you die. They then collect the death benefit. You no longer own the policy, so your beneficiaries will not receive anything.

Do You Pay Taxes on Cash-Out Life Insurance Policies?

You are usually not required to pay taxes when you cash out a life insurance policy. However, there are two exceptions.

If you cash out an amount that exceeds the premiums you’ve paid, you must pay taxes on the profit. So, if you’ve paid $5,000 in premiums and cashed out at $6,000, you’ll need to pay taxes on the $1,000 overage.

You‘ll also need to pay taxes if you let the policy lapse before you pay back any loans. You’ll pay taxes on the amount of the loan you owe when the policy ends.

Does It Make Sense to Cash In on a Life Insurance Policy?

If you need cash in the short term and don’t mind giving up long-term advantages, considering cashing in on your policy may make sense. It can also be used if you need a personal loan and can’t find attractive terms.

For those who have expensive premiums that they can no longer keep up with, cashing in may be a viable option.

All in all, it depends on your circumstances. Consult a financial adviser to determine whether this option is suitable for you.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.