A life insurance policy holds financial value long before the death benefit is paid.

A life insurance policy often sits quietly in a financial portfolio. Over time those steady premium payments build real cash value, turning certain types of life insurance coverage into an asset rather than simply a future death benefit; but circumstances change.

Medical expenses rise, income slows, and the cost to pay premiums each year may begin to compete with other financial priorities that matter more in the present. Many policyholders reach a moment when the question becomes practical rather than theoretical: Is it possible to cash out a life insurance policy and access money while the policyholder is still living?

According to research from LIMRA, a large majority of life insurance policies are surrendered or lapse before the death benefit is ever paid. For those who decide to act earlier, several paths provide access to that value. Each produces very different financial outcomes depending on the structure of the life insurance policy, the amount of accumulated cash value, and the rules set by the life insurance company that issued the coverage.

Some people choose to borrow money against the policy’s cash value, others decide to withdraw cash directly from the policy, and some policyholders explore selling their life policy through a life settlement or viatical settlement that converts the policy into a lump sum cash payment.

The difference between these options can amount to tens or even hundreds of thousands of dollars depending on the death benefit, the policy structure, and the financial priorities of the policyholder.

>>MORE Can You Sell Your Life Insurance Policy?

Ways to Cash Out a Life Insurance Policy Before the Death Benefit Is Paid

A life insurance policy delivers a death benefit to beneficiaries after the insured person dies. Some policies also build cash value, which means policyholders may be able to cash out a life insurance policy or access cash while the policyholder is still living.

Several methods allow a policyholder to draw money from a life insurance policy, and each method changes the structure of the policy in different ways depending on how the funds are taken and whether the life insurance coverage remains active afterward.

Most ways to cash out life insurance rely on the value that accumulates inside certain cash value life insurance products, particularly whole life insurance, universal life, and other forms of permanent life insurance where part of every life insurance premium contributes to cash value accumulation over time.

How much is my life insurance policy worth?

The most common ways people cash out a life insurance policy include:

Method	What Happens
Policy loans	Borrow money against the policy’s cash value while continuing to pay premiums and keep the coverage active
Withdrawals	Take funds directly from the policy’s accumulated cash value
Cash surrender	Cancel the policy and receive the cash surrender value offered by the life insurance company
Selling the policy	Transfer ownership through a life settlement or viatical settlement in exchange for a lump sum cash payment

Each option pulls value from a different part of the life policy, and the difference between them can be significant depending on the death benefit, the size of the cash value, and the cost of ongoing premium payments.

Some methods draw only from the policy’s cash value, which may represent a small portion of the policy’s face value. Other options evaluate the entire death benefit, which can produce a substantially larger cash payment under the right circumstances.

Borrowing Against the Cash Value of a Life Insurance Policy

A policy loan allows a policyholder to borrow money from the cash value inside a permanent life insurance policy while the life insurance coverage stays active. The life insurance company uses the policy’s accumulated cash value as collateral rather than requiring a credit check like a bank loan or personal loan.

Consider a whole life insurance policy with a $500,000 death benefit and $60,000 in cash value built from years of premiums paid.

Most insurers allow loans of roughly 70–90% of the policy’s cash value.

Policy Value	Amount
Cash value	$60,000
Possible loan amount	~$45,000

The policyholder receives the money and continues to pay premiums as usual. Interest begins accumulating on the loan balance, and the outstanding loan balance is deducted from the death benefit paid later.

Example outcome:

Loan taken: $45,000
Interest accumulates
Beneficiaries receive: $455,000 instead of $500,000

What happens if the loan balance grows larger than the policy’s cash value?

The life insurance policy can lapse, which may create taxable income if the borrowed funds exceed the premiums paid into the policy.

What you need to know when borrowing against life insurance

Withdrawing Cash From a Permanent Life Insurance Policy

A withdrawal allows a policyholder to withdraw cash directly from the cash value of a permanent life insurance policy such as a whole life insurance policy or universal life policy. The money comes from the cash value accumulation created by years of life insurance premium payments.

How to Use Life Insurance While Alive for Financial Flexibility

Consider the same example.

Policy Detail	Amount
Face value (death benefit)	$500,000
Cash value	$60,000

If the policyholder withdraws $40,000, the money comes directly from the policy’s cash value.

Policy Component	Before	After
Cash value	$60,000	$20,000
Death benefit	$500,000	~$460,000

The policy remains active and the policyholder continues to pay premiums, but the death benefit paid to beneficiaries is permanently lower.

Does withdrawing money trigger income tax?

Withdrawals up to the amount of premiums paid into the policy are generally not taxable, but any amount above that level may be treated as ordinary income depending on the policy structure.

Cash Surrender Value From a Life Insurance Company

Some policyholders choose to cash out a life insurance policy by surrendering it directly to the life insurance company. This process cancels the life insurance coverage and pays the policyholder the cash surrender value that has accumulated inside the policy.

Consider the same policy example.

Policy Detail	Amount
Whole life insurance policy face value	$500,000
Accumulated cash value	$60,000

If the policyholder chooses cash surrender, the insurance company ends the policy and pays the available cash surrender value.

Outcome	Amount
Cash received	~$55,000–$60,000
Future premium payments	$0
Death benefit	$0

The policy no longer exists once surrendered.

Why does the cash surrender value often appear much smaller than the death benefit?

Because the cash value life insurance component reflects only the portion of premiums paid that accumulated inside the policy after insurance costs and fees, while the death benefit represents the full contractual payout promised to beneficiaries.

See our glossary of life insurance terms to help make sense of it all.

Selling a Life Insurance Policy Through a Life Settlement or Viatical Settlement

Some policyholders choose to cash out a life insurance policy by selling it for a lump sum cash payment rather than borrowing from the cash value or accepting the cash surrender value offered by the life insurance company. This option evaluates the policy using more than the policy’s cash value, which is why the payout can look very different from a withdrawal or surrender.

Consider the same example.

Policy Detail	Amount
Life insurance policy face value	$500,000
Cash surrender value	~$55,000–$60,000

If that policy is reviewed for a life settlement or viatical settlement, the payout may be substantially higher.

Option	Possible Amount
Cash surrender	~$55,000–$60,000
Viatical settlement	up to 70% of the policy face value ~$350,000

Why can the number be so much higher?

Because a settlement values the policy as a saleable financial asset rather than limiting the payout to the accumulated cash value inside the contract.

Why Viatical Settlements Exist and What It Takes to Qualify

A viatical settlement exists because a life insurance policy often holds far more financial value than its cash value suggests when serious illness changes a person’s financial priorities.

Medical treatment, nursing care, travel for specialists, and reduced income can place enormous pressure on a household. Many policyholders reach a point where the future death benefit no longer serves its original purpose. Turning that policy into a lump sum provides immediate financial flexibility at the moment it matters most.

Eligibility depends on two main factors:

The structure of the life insurance policy
The medical situation of the insured.

Policies such as whole life, universal life, and certain term life conversions are commonly reviewed, and the policy must have sufficient value for a buyer to assume the future premium payments. The medical condition of the insured also plays a role in determining how a policy may be evaluated, something discussed in more detail when reviewing viatical settlement eligibility.

Readers often compare this option with other policy sale structures. The differences between a traditional settlement and a viatical arrangement become clearer when examining life settlement vs. viatical settlement structures side by side.

The reasons people pursue this option vary widely. Some use the funds to pay for treatment, others to relieve debt, and some simply to improve their quality of life during a difficult period, situations often described when looking at common reasons and benefits of a viatical settlement.

Many policyholders also want to know what the process actually looks like from start to finish, which is why a step-by-step explanation of the viatical settlement process often becomes the next point of research.

Get Your Free Estimate

>>MORE The Difference Between Viatical Settlements VS Life Settlements

Should You Cash Out a Life Insurance Policy or Keep Your Coverage?

Every life insurance policy eventually reaches a point where the owner must decide how that asset fits into their financial future. Some policyholders continue to pay premiums so the full death benefit remains in place for beneficiaries. Others decide to access cash earlier because the policy’s value may be more useful during life.

Loans and withdrawals provide access to a portion of the policy’s cash value, but they also reduce the policy’s death benefit and create a growing loan balance or permanent reduction in coverage. Surrendering the policy removes the life insurance coverage entirely and usually produces only the cash surrender value, which reflects the accumulated cash after insurance costs and other deductions.

Selling a policy through a life settlement or viatical settlement evaluates the entire life policy rather than only the cash value accumulation, which is why some policyholders receive a significantly larger cash payment than other options provide. For individuals facing serious illness or major financial pressure, converting the policy into a lump sum may remove future premium payments while providing immediate funds that can be used for medical care, household expenses, or long-term planning.

Every policy is different. The size of the death benefit, the structure of the permanent life insurance policy, the amount of premiums paid, and the remaining insurance costs all influence what options may be available.

Policyholders who want to understand how much their life insurance policy might be worth can request a confidential evaluation through American Life Fund. A short review of the policy can help determine whether a viatical settlement or other option may provide meaningful financial value.

Start with a free policy estimate to see whether your life insurance policy may qualify for a lump sum cash payment.

FAQs

Frequently Asked Questions About Cashing Out a Life Insurance Policy

Can you cash out a term life insurance policy?

In most cases, term life insurance does not build cash value, so it cannot be cashed out in the same way as whole life insurance or other permanent life insurance policies. Term policies provide life insurance coverage for a specific period rather than accumulate value over time.

However, some term policies include a conversion option that allows the policyholder to convert the coverage into a permanent policy. Once converted, the policy may begin building cash value, which could later be accessed through loans, withdrawals, or a settlement depending on the policy structure.

Do you have to pay taxes when you cash out a life insurance policy?

Taxes depend on the method used to access funds. Withdrawals and policy surrenders may require the policyholder to pay taxes if the amount received exceeds the premiums paid into the policy. The portion above that amount may be treated as ordinary income.

In contrast, most viatical settlements are typically tax free when the policyholder qualifies under federal tax rules related to serious or terminal illness. Individual situations vary, so policyholders often review potential tax implicationswith a financial or tax advisor before making a final decision.

What happens if interest payments on a policy loan are not repaid?

When a policyholder borrows money against the policy’s cash value, the loan begins accumulating interest payments. If the loan is not repaid, the interest continues adding to the outstanding loan balance.

Over time, the growing balance can begin consuming the cash value accumulation inside the policy. If the balance becomes too large and the policy no longer has enough value to support it, the policy lapses and the coverage ends. This situation may also create a potential tax event if the loan amount exceeds the premiums paid into the policy.

What happens if life insurance premiums are no longer paid?

If a policyholder stops making premium payments, the result depends on the type of policy and how much cash valuehas accumulated.

Permanent policies may use the remaining cash value to temporarily cover unpaid premiums, allowing the coverage to continue for a period of time. Once that value is exhausted, the policy lapses and the life insurance coverage ends.

Many policyholders explore options such as withdrawals, policy loans, or settlements before allowing a policy to lapse so that the remaining value can still be used.

Why are surrender charges applied when canceling a life insurance policy?

Many permanent policies include surrender charges during the early years of the policy. These charges allow the insurance company to recover administrative costs associated with issuing and maintaining the coverage.

When a policyholder chooses cash surrender, the insurer subtracts those surrender charges from the accumulated cash value before issuing the final payment. This is one reason the cash surrender value may be lower than many policyholders expect.

How does American Life Fund help policyholders access the value of their life insurance policy?

American Life Fund specializes in helping policyholders evaluate whether their life insurance policy may qualify for a viatical settlement. Instead of allowing a policy to lapse or accepting only the cash surrender value, eligible policyholders may be able to convert their coverage into a lump sum cash payment.

The process begins with a confidential review of the policy, including the death benefit, policy structure, and other factors that influence its potential value.

Is there a cost to find out if my life insurance policy qualifies?

No. American Life Fund offers a free policy evaluation that allows policyholders to understand whether their life insurance policy may qualify for a viatical settlement and what potential payout range might be available.

There is no obligation to move forward after the review. The goal is simply to help policyholders understand the options available for accessing the value of their life insurance coverage.

Is it better to take a policy loan or sell a life insurance policy?

A policy loan allows a policyholder to borrow money against the policy’s cash value while keeping the life insurance coverage in place. However, the loan creates a growing loan balance that includes ongoing interest payments, and that balance reduces the death benefit paid to beneficiaries if it is not repaid.

Selling the policy through a life settlement or viatical settlement works differently. Instead of borrowing against the cash value, the policy itself is converted into a lump sum cash payment, and the responsibility to pay premiums moves to the buyer. For policyholders facing major medical expenses or financial pressure, this option can sometimes unlock more value than a loan tied only to the cash value accumulation.

How long does it take to receive money from a viatical settlement?

With American Life Fund, many policyholders receive their lump sum payment in as little as a few weeks after submitting the necessary information about their life insurance policy.

The timeline depends mainly on how quickly the insurance company and medical providers release the required records. Once those documents are reviewed and an offer is accepted, funds are placed in escrow and released shortly after the closing paperwork is completed.

Cash Out a Life Insurance Policy: Access Cash Value Before the Death Benefit Is Paid