Surrendering cash value life insurance 

One of the benefits of owning a life insurance policy that builds cash value is that it gives you control of a capital reserve that you can access if you have a financial need or exciting opportunity. This article explains why cash value is important, how and when you can access it, and which life insurance policies offer this feature. 

Can you cash in a life insurance policy?

Yes, in many cases you can—but it depends on the type of policy you own. While the main purpose of life insurance is to protect your family financially after you are gone, many permanent life insurance policies accumulate cash value that you can borrow against or withdraw if needed.

Only permanent life policies build cash value

Permanent life insurance is the only type of coverage that comes with a cash value component. Whole life offers consistent, guaranteed cash value growth, while universal life provides more flexibility in premiums and growth potential tied to interest rates or market performance.

Term life does not have cash value

Term life policies offer what some people consider to be “pure” life insurance because they provide basic death benefit protection without a cash value component. While this often makes term life insurance more affordable, it also means that you won’t be able to cash in or surrender your coverage if your circumstances change. It may be possible, however, to convert your term policy into a whole life policy that will allow you to build cash value. Talk to your financial professional or a New York Life agent.

Can I access the full amount of my policy?

No. A policy that has a $50,000 life insurance benefit cannot be cashed in for $50,000. That amount can only be collected by your beneficiaries when you pass, provided you didn’t access any cash value. The amount you will be able to cash in will depend on how much cash value the policy has built, which is almost always considerably less than the death benefit and can vary dramatically depending on how you’ve structured your policy.

Are there penalties on a life insurance payout?

Generally, yes. Depending on how you choose to get your life insurance payout, you will likely be subject to some fees and may owe taxes. Each policy will be different, and it’s important to understand all the details before you take this step. Please note that cash value takes time to build, so there may be little to no cash value accumulated during the early years. In addition, if you withdraw too much or can no longer make premium payments, you may lose your coverage completely.

Alternatives to cashing in your life insurance

It could be wise to investigate other options for procuring immediate cash, like home equity loans, personal loans, borrowing against a 401(k), or even a 0% APR credit card—depending on your present and future financial needs.

Cash value of life insurance explained

Cash value life insurance is permanent life insurance that grows cash value over time. You can withdraw or borrow against the accumulated cash value to supplement retirement savings, pay down a mortgage, and cover unforeseen emergency costs or unexpected expenses. The amount of cash value your life insurance holds depends on the premiums you pay, the length of time you’ve held the policy, and any specific details or add-ons you may have chosen when you purchased your policy.

Part of the premium converts into cash value

Cash value builds up over time as you pay your premiums, and a portion of the premiums goes into a fund. This is generally a small percentage, but it differs based on the type of insurance policy and its features. (It’s important to note that not all policies accumulate this way.)

Your cash value grows over time

As you continue to make premium payments, the cash value of your policy increases. There are also add-ons, called “riders,” that allow you to contribute more to your policy so you build cash value faster. Speak to an agent to learn more about rider features and how you can use them to customize your policy.

Reducing the cash value reduces your life insurance benefit

If you borrow or make withdrawals from your cash value, the death benefit of your life insurance will also go down. That means your beneficiaries, likely your family, will receive a reduced payment when you pass. You’re basically converting money for them later into money you can use now. Consider this trade-off carefully when deciding whether to access the cash value of your life insurance.

How to calculate the cash value of life insurance

The cash value of your whole life insurance policy calculation depends on your premium payments, the type of policy you have, and any loan balances. You can typically find the cash value amount on your life insurance statement, together with your surrender cash value. There should be a section that highlights the guaranteed cash value your policy has accumulated over time. If you’re not sure about the number or can’t locate it on your statement, reach out to your insurer, or contact your agent.

How do I cash in a life insurance policy?

There are a few ways to get cash value out of your policy. The option that best suits your situation will depend on how much you need and how important it is to keep your policy coverage.

Use the cash value to pay your premiums

If you are struggling to keep up with premiums but want to keep your life insurance policy in place, there are ways you can apply the cash value to help pay premiums. Keep in mind that this works differently with each type of policy. In some cases, you can use the dividends you potentially receive to help pay your premiums, and in other cases, such as with universal life, the cost of your premiums comes directly out of the cash value.

Make a partial withdrawal

Depending on your life insurance policy and how it’s customized, you may be able to withdraw money directly from the cash value. Each policy is different, so you may or may not be subject to early withdrawal fees that affect your overall benefits.

Borrow against the policy

You can often take out a loan with the cash value of your life insurance policy as collateral. With any loan, however, you’ll be charged interest—usually at a more favorable rate than you would get on the open market. If the loan isn’t paid back before you pass, it’s usually deducted from the death benefit, which means your beneficiaries will receive less than you intended. It should be noted that if you surrender your policy while you have an outstanding policy loan, you may be liable for federal or state income taxes if the value of the outstanding loan plus your cash surrender value is more than the total amount of premiums you have paid into your policy (less certain non-taxable distributions).

Surrender the policy

This means functionally canceling your policy. If you do this, your life insurance coverage will end. You’ll generally receive most or all of the cash value that has accumulated in your life insurance policy, but it may be subject to surrender fees and federal income taxes. Any unpaid premiums will also be collected.

Sell it to a third party

Selling your life insurance policy is functionally the same as surrendering your policy. You will no longer have coverage. The difference between the amount you receive if you sell a life insurance policy to a third party and the amount you receive for simply surrendering the policy will vary depending on many factors. If you sell the policy, you may also be subject to large commissions and fees that reduce the amount you receive.

If you are considering cashing in your life insurance policy, the best thing you can do is to talk to a trusted financial professional who can help you go over all your options and find the path forward that’s best for you and your family.

Surrendering cash value life insurance FAQs

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¹Loans against your policy accrue interest and decrease the death benefit and available cash surrender value by the amount of the outstanding loan and interest. Loans and partial surrenders will reduce the available cash surrender value and death benefit.

Certain tax advantages are no longer applicable to a life insurance policy if too much money is put into the policy during its first seven years, or during the seven-year period after a “material change” to the policy. If the cumulative premiums paid during the applicable seven-year period at any time exceed the limits imposed under the Internal Revenue Code, the policy becomes a modified endowment contract, or MEC. An MEC is still a life insurance policy, and death benefits continue to be tax-free, but any time you take a withdrawal from an MEC (including a policy loan), the withdrawal is treated as taxable income to the extent there is gain in the policy. In addition, if you are under age 59½, a penalty tax of 10% could be assessed on those amounts and upon surrender of the policy.

Neither New York Life Insurance Company (New York, NY) nor its agents provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.