Yes, most permanent life insurance policies let you take money out through loans or withdrawals. A policy loan borrows against the cash value and must be repaid with interest; a withdrawal reduces the cash value and may trigger tax on any gain. The exact rules depend on the policy type and state regulations.
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Types of Policies That Offer Cash Value
Whole life, universal life, and variable universal life policies accumulate cash value over time. Term life policies do not.
Policy Loans
Policyholders can borrow up to the accumulated cash value minus any outstanding loans. The loan accrues interest, and if unpaid, the amount plus interest is deducted from the death benefit and cash value. Loans do not create a taxable event unless the policy lapses.
Withdrawals
Withdrawals are taken directly from the cash value. The first portion up to the cost basis is tax‑free; amounts above that are taxed as ordinary income. Excessive withdrawals can reduce the death benefit and may trigger a policy lapse.
Impact on Premiums and Death Benefit
Both loans and withdrawals lower the cash value, which can reduce the death benefit unless additional premiums are paid. The policy's surrender value—what the insurer pays if you cancel—also falls accordingly.
Tax Considerations
Unpaid loans are not taxed, but a policy that lapses with a loan becomes a taxable event. Withdrawals exceeding the cost basis are taxable. Consulting a tax professional is advised.
When to Use a Policy Loan or Withdrawal
Common uses include bridging cash flow, paying for education, or funding a small business. Because borrowing reduces the death benefit, consider the long‑term impact on beneficiaries.
State Regulation Variance
State laws govern how much can be withdrawn or loaned and the interest rates insurers may charge. Checking your state's insurance department guidelines is essential.
Alternatives to Pulling Money From Your Policy
- Rebalancing the policy's investment allocations (for variable policies)
- Adjusting premium payments or switching to a more liquid policy
- Seeking other credit options like personal loans or lines of credit
Summary
Withdrawing or borrowing from a permanent life insurance policy is possible, but it reduces the death benefit and may incur interest or taxes. Evaluate the financial trade‑offs and consult professionals before proceeding.