There are two main ways to get cash out of your permanent life insurance policy: you can borrow from it or surrender the policy and get the full balance of your cash-value account.

Depending on which option you choose, there are some things to consider. Let’s discuss each one in turn.

Borrowing from Your Life Insurance Policy

If you need some cash but don’t want to cancel your policy, you can borrow from it. For many, borrowing from a life insurance policy could be a better choice than taking out a loan from a conventional lender.

Here are some of the benefits:

  • You don’t have to undergo a credit check to get approved.
  • The loan won’t show up on your credit report.
  • You may even get a lower interest rate than you’d get with a credit card or personal loan.
  • You can choose your repayment period.
  • If you don’t want to, you don’t have to repay the loan at all.
  • In most cases, you don’t have to pay taxes on the money you borrow.

On the flip side, here are some drawbacks:

  • You may be limited on how much you can borrow; for example, up to 90% of your total cash value.
  • Your death benefit is reduced by the amount of the loan. If you don’t pay it, your loved ones get less money.
  • The interest you pay goes to the insurance company, not back into your cash-value account. If you surrender your policy or it lapses before you pay back the loan, you could owe taxes on a portion of the loan.
  • If you haven’t had the policy very long, there may not be much cash value to borrow from.

Before you borrow from your cash value, check with the insurance company to understand the terms. Then, consider whether the benefits are worth the costs you and your dependents might have to deal with later on.  

Surrendering Your Life Insurance Policy

If you don’t need your permanent life insurance policy any longer or can’t keep up with the premium payments, you can surrender the policy can get most of the cash value you’ve built over its life.

Here are some of the benefits of surrendering your policy instead of borrowing from it:

  • You don’t have to deal with interest charges.
  • You don’t need to repay the money.
  • You’re not limited to how much money you can take out.
  • If you’ve had the policy for a long time, the cash value balance could be substantial.

Before you cancel, though, consider these disadvantages:

  • You may have to pay surrender charges, which can decrease your payout.
  • Surrendering the policy means that your loved ones get nothing when you pass.
  • Your gains, calculated as the surrender amount minus fees and premiums paid, are taxable.
  • If you haven’t had the policy long, you may not get much back.

Before surrendering your life insurance, make sure that you don’t still need the insurance. If you do, you can replace your permanent policy with a cheaper term policy. But if you have health issues and can’t qualify for term life, it might be better to hold onto the coverage you already have.

Should You Cash Out Your Life Insurance?

Before you consider getting cash from your life insurance policy, ask yourself how badly you need the cash. If it’s for an unnecessary purchase, the drawbacks of each of these options may outweigh the benefits.

But if you’re planning on canceling your policy anyway or you need the cash and don’t have other ways to get it, your life insurance might be a good option.

If you’re already planning on canceling your permanent life insurance, you’ll automatically get a portion of your cash value back. Consider working with a tax professional to know how much you should set aside to pay taxes on your gains.

If you still need life insurance, however, and term insurance isn’t an option, consider borrowing from the policy instead of surrendering it.

If you do, create a payoff plan to avoid paying interest for too long. Also, make sure to continue making premium payments, so you don’t run into tax issues if the policy gets canceled.