Key takeaway
You can ‘cash out’ permanent life insurance (whole life or universal life) by surrendering the policy for its cash surrender value, taking a policy loan, or making a partial withdrawal if the contract allows. Term life has no cash value and cannot be cashed out. Surrender may trigger tax on the gain (cash value minus adjusted cost basis); policy loans are not taxable.
Surrendering the policy for cash
Surrendering cancels the policy and pays you the cash surrender value (cash value minus surrender charges and any loans). Surrender charges are highest in the first 10–15 years and can significantly reduce what you receive. The insurer will report the taxable gain (surrender value minus adjusted cost basis) on a T5; you include it in income for that year.
Only permanent policies have cash value. Term life has no cash value and cannot be cashed out.
Policy loans
You can borrow against the cash value without cancelling the policy. The loan isn’t taxable. Interest is charged (often 5–8%); if you die with an outstanding loan, the balance is deducted from the death benefit. Policy loans are usually more tax-efficient than surrendering when you need temporary access to cash.
Partial withdrawals (universal life)
Many universal life contracts allow partial withdrawals. Amounts up to your adjusted cost basis are typically tax-free; amounts above can be taxable. Withdrawals reduce both cash value and death benefit. Check your contract for limits and any charges.
Alternatives before you cash out
Consider reduced paid-up insurance (keep a smaller, paid-up policy with no more premiums), or a policy loan instead of surrender, so you keep some coverage. If you’re replacing the policy, don’t cancel the old one until the new one is in force.
Frequently asked questions
Can you cash out term life insurance?
No. Term life has no cash value. Only permanent policies (whole life, universal life) build cash value that you can access by surrender, loan, or withdrawal.
Is cashing out life insurance taxable?
Surrender and withdrawals above your adjusted cost basis are taxable as income. Policy loans are not taxable. Your insurer reports the taxable amount on a T5 for surrender or certain withdrawals.
How much do I get if I surrender my policy?
You receive the cash surrender value: cash value minus surrender charges, outstanding loans, and fees. Your annual statement often shows both cash value and surrender value; the difference is the surrender charge.
Should I take a policy loan or surrender?
If you need cash but want to keep coverage, a policy loan is usually better — no tax and the policy stays in force. Surrender makes sense when you no longer need the policy and want to end premiums and access the full cash value (minus tax).