How to Get Money from a Life Insurance Policy?

Life insurance is often thought of as something that only pays out when you die. The reality is that depending on your policy type, you may be able to access money from your life insurance while you're still alive and in multiple ways. This guide covers every method available for policyholders and beneficiaries.

Option 1: Death Benefit Payout (For Beneficiaries)

The most common way money flows from a life insurance policy is the death benefit, paid to named beneficiaries when the insured passes away. This is available with all policy types (term and permanent). The payout is generally tax-free and can be received as a lump sum, as regular installment payments, or held in an interest-bearing retained asset account. To receive the death benefit, beneficiaries must file a claim with the insurer, submit a certified death certificate, and complete a claim form. Most payouts are processed within 14 to 30 days.

Options 2: Policy Loans (For Policyholders with Permanent Coverage)

If you have a whole life or universal life policy with accumulated cash value, you can borrow against it without a credit check or income verification. Policy loans have several unique advantages: 

• No approval process — you borrow from your own cash value
• Low interest rates (typically 5–8%)
• No repayment schedule required — repay on your own timeline
• The loan is not taxable income

Important: Outstanding loan balances plus interest are deducted from the death benefit if not repaid. If the loan balance grows to exceed your cash value, the policy can lapse.

Option 3: Cash Value Withdrawls

With universal life and some whole life policies, you can make direct withdrawals from your cash value, not loans, but actual withdrawals that permanently reduce your cash value and potentially your death benefit. Key rules: 

• Withdrawals up to your policy basis (total premiums paid) are generally tax-free
• Withdrawals above the basis are taxable as ordinary income
• Withdrawals permanently reduce cash value, unlike loans

Option 4: Surrender the Policy

Surrendering a policy means canceling it entirely in exchange for its surrender value, the accumulated cash value minus any applicable surrender charges. This is a permanent decision: once surrendered, you lose all coverage and cannot reinstate the policy. Surrender charges typically apply during the first 10–15 years of a permanent policy and decrease over time. The surrender value is taxable as income to the extent it exceeds your policy basis. Before surrendering, consider alternatives: a policy loan, a reduced paid-up option (no more premiums, reduced death benefit), or a 1035 exchange (rolling cash value tax-free into a new policy or annuity).

Option 5: Accelerated Death Benefits (Living Benefits)

Many modern life insurance policies include an accelerated death benefit (ADB) rider, sometimes called a living benefit rider, at no extra cost. This allows policyholders to access a portion of their death benefit while still alive if they are diagnosed with: 

• A terminal illness (typically a life expectancy of 12–24 months)
• A chronic illness affecting activities of daily living
• A critical illness such as cancer, heart attack, or stroke

The amount accessed reduces the remaining death benefit dollar for dollar. Accelerated benefits are generally not taxable under current IRS guidelines, though tax treatment can vary.

Option 6: Life Settlements

A life settlement involves selling your existing life insurance policy to a third-party investor for more than its surrender value but less than the face value of the death benefit. The investor continues paying premiums and collects the death benefit when you pass. Life settlements are typically available to policyholders aged 65+ with policies of $100,000 or more in face value. Life settlements require careful consideration of tax implications and long-term needs. Consult a financial advisor before pursuing this option.

Which Option is Right for You?

The best way to access money from your policy depends on your reason for needing funds, your policy type, your tax situation, and whether you want to maintain coverage. Here's a quick summary:

How Life Insured By Chris Can Help?

Life Insured By Chris helps clients not just choose the right policy at the start but maximize the value of their policies throughout their lifetime. Whether you're looking to leverage cash value, understand your living benefit options, or plan your estate, we're here to help with no-pressure guidance.