Can I Take Out Money Out of My Life Insurance Policy?

Yes, you can take out money out of your life insurance policy but it depends on the type of policy you have. Usually when you die then your beneficiaries receive a payout called a death benefit. When you outlive your policy, then you may or may not receive maturity benefits depending on the type of plan you own.

Generally, term insurance plans do not offer maturity benefits while investment cum insurance plans offer payouts at the end of the policy term.

How Does Withdrawing From Life Insurance Work?

You can use the cash value of your permanent life insurance policy while you are still alive.

You have several options for extracting cash value from your life insurance plan while you’re still alive. Some of the options include:

• Borrowing against the policy
• Surrendering the policy
• Withdrawing partial sums

Ways to take out money from your life insurance plan

Borrowing against the Policy

Borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. You can only borrow against a permanent or whole life insurance policy. Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan.

Surrendering the Policy

In case of life insurance, if you surrender a policy before the completion of its full term, you could get back a portion of the money you paid as premium, after deducting charges. The money you receive via this method is called surrender value.

Withdrawing Partial Sums 

Withdrawing money from your life insurance policy with cash value might be allowed with a tax free basis. However if you take out money exceeding the cash value then you will be required to pay income tax on that money. So in short you can withdraw only to the amount you have paid the premiums. The amount withdrawn above that will be taxable.

A Word of Advice

Don’t use up the entire cash value of your policy as this will leave you without any life insurance protection. If you use up the entire cash value then your policy might also get cancelled. For certain legit reasons it is sensible to use the money like for example:

• Covering an aging parent's health care expenses
• Making a down payment on a new home
• Paying for college/school tuition

Note that if you withdraw or take out money from your life insurance policy then probably you will leave less for your beneficiaries when you are gone.