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Can you really use your life insurance while you’re still alive?
Yes, and it might be one of the most misunderstood benefits of whole life insurance.
Whole life policies offer more than just a payout when you pass, they build cash value that you can actually access and use during your lifetime.
But if you're thinking about tapping into it, it's important to know the impact. Taking out cash could reduce your death benefit, trigger fees, or even come with tax consequences.
At BetterWealth, we believe your life insurance should support both your legacy and your life. Understanding your options helps you make more intentional decisions that align with your long-term goals.
In this blog, we will talk about:
Let’s look at how whole life insurance can become a flexible financial tool, not just a safety net.
Whole life insurance offers lifelong protection while building cash value you can access. It combines a death benefit with a savings element that grows over time. This makes it both a safety net for your family and a financial tool you can use while alive.
Whole life insurance keeps your coverage active for your entire life, as long as you pay the premiums. Unlike term life insurance that only covers you for a set number of years, whole life does not expire.
You pay fixed premiums, which do not increase over time. When you pass away, your beneficiary receives the policy’s death benefit to cover expenses like debts, funeral costs, or income replacement. This type of policy suits people looking for stability and long-term protection. It also acts as a financial asset because it builds cash value, unlike term insurance that only pays after death.
Whole life insurance includes several essential features:
These features make whole life insurance more than just a safety net. It can help you plan taxes, retirement, and estate needs with flexibility.
The cash value in a whole life policy builds gradually from your premium payments. Part of what you pay goes to the insurance cost, while the rest grows as cash value with interest.
You can access this cash value in two main ways:
The cash value grows tax-deferred, meaning you don’t pay taxes on the gains while it remains in the policy. Some policies also pay dividends, which boost cash value beyond the guaranteed amount. Accessing cash value affects your coverage, so it’s essential to consider your financial goals before using these funds. This feature allows you to meet needs like emergencies or opportunities while your policy remains in force.
You can access the cash value built inside a whole life insurance policy, but how you do it affects your policy and finances differently. Your choice will impact how much money you get, tax implications, and whether your coverage stays active.
You must have built enough cash value over time to cash out your whole life insurance policy. This usually takes several years since early policy years pay more toward fees and less toward cash value. You must check if your policy’s cash value exceeds outstanding loans or fees. If you still owe money on your policy, like unpaid loans, the cash-out amount will be reduced by that balance.
Also, you might face fees if you’re under the policy’s surrender period. Some policies require you to be the owner or have specific permission to cash out.
Surrendering your policy means you give up your life insurance coverage in exchange for the policy’s cash value. The insurer pays you the cash value minus debts, unpaid premiums, and surrender charges. This ends your coverage immediately. You lose the death benefit, and surrender charges often apply most in the early years.
After paying off debts and fees, you receive the remaining cash value as a lump sum. Remember, the money you get might be taxable if it exceeds the total premiums you paid. Surrendering is best when you no longer need insurance or want to free up cash quickly.
When accessing your life insurance cash value, you can choose between partial withdrawals or surrendering the policy.
Aspect
Partial Withdrawal
Full Surrender
Cash Access
Withdraw a portion of the cash value
Receive the entire cash value at once
Coverage
Policy stays active, but with a reduced death benefit
Coverage ends permanently
Death Benefit Impact
Reduced based on withdrawal amount
Eliminated completely
Policy Loans Option
Possible, borrow against the cash value with repayment required
Not applicable
Flexibility
Provides access while maintaining some protection
Offers complete access but no future coverage
Best For
Those needing some funds but wanting to keep insurance
Those who no longer need coverage and want full value
Both options can serve different needs, partial withdrawals, balance access, and protection, while complete surrender provides total cash but ends coverage.
You have several ways to access your life insurance policy's cash value. Each method offers different benefits and impacts your policy’s value and protection.
Surrendering means you cancel your whole life insurance policy to get the cash value. This option gives you a lump sum payment, minus any surrender charges or fees. While surrendering provides immediate access to your funds, your life insurance protection ends. This can affect your family's financial security if something happens later.
Before surrendering, check if your policy has any penalties or taxes. The amount you get is the cash value minus what you owe in loans and fees. This method is best if you no longer need the coverage and want the cash outright.
A policy loan lets you borrow money using your cash value as collateral. You pay interest on the loan but usually don’t have to follow a strict repayment schedule. Loan proceeds are generally tax-free if you manage the loan carefully. However, unpaid loans reduce your death benefit and cash value.
If you don’t repay the loan, the insurer will subtract the balance from your death benefit. This keeps your policy active and available for future use. It’s a flexible option if you want to keep coverage while accessing cash.
You can also withdraw part of your cash value without canceling the policy. Withdrawals reduce your cash value and may lower your death benefit, depending on the amount taken. Unlike loans, withdrawals do not have to be repaid. Some policies allow partial withdrawals up to the amount of your premiums paid without tax.
Withdrawals can be useful for short-term needs or to supplement your income. It’s important to check if your policy charges fees or impacts future growth before using this option.
Cashing out a whole life insurance policy affects your finances in several ways. You need to consider fees, taxes, and how it changes your policy's benefits. These factors impact how much money you actually receive and what that means for your coverage.
When you cash out your whole life insurance, you may face surrender charges. These are fees charged by the insurer if you surrender the policy early, usually within the first 10 to 15 years. Surrender fees reduce the amount of cash you get. They can be a fixed amount or a percentage of your policy’s cash value.
Check your policy details to learn the exact charges. Some policies have administrative fees or penalties in addition to surrender fees, which can further lower your payout. Over time, fees often decrease, so waiting can reduce costs.
Cashing out your whole life policy can trigger taxes. The amount subject to tax is the cash you receive above what you paid in premiums. For example, if you paid $30,000 in premiums and your policy’s cash value is $40,000, you may owe taxes on the $10,000 gain. This gain is usually taxed as ordinary income.
If you take a loan or partial withdrawal instead of surrendering, taxes might be different or delayed. Loans are not taxable if repaid, but unpaid loans reduce death benefits. Before cashing out, consider how the tax impact fits your financial plan. Consulting a tax professional is often a smart move.
Accessing your policy’s cash value can affect the payout your loved ones receive. Here are the key points to know:
Ultimately, weigh your immediate financial needs against your long-term goal of protecting your family’s future.
When you need access to your whole life insurance policy’s value, cashing out is not your only choice. You can use your policy differently to keep coverage in place or reduce negative financial impacts. These options offer flexibility while maintaining some benefits of your policy.
You can borrow money using your whole life insurance policy as collateral. Many policies allow loans against the cash value without triggering immediate taxes. This means you get access to funds without giving up your coverage. However, loans reduce the death benefit until repaid.
Interest accrues on the loan, so you should have a plan to pay it back. A loan won’t affect your credit score or require a credit check. This can be a faster way to get cash while keeping your policy active, especially when you expect to repay the amount.
You can reduce the death benefit if you want to lower your premiums but keep your insurance. This lowers the amount your beneficiaries receive but decreases your monthly cost. The cash value stays intact but will grow more slowly. Reducing the death benefit helps if you need to retain some coverage but can't afford higher premiums.
It’s a way to balance cost with protection without surrendering the policy altogether. Talk with your agent to see if this fits your financial goals.
Sometimes, it’s best to keep your whole life insurance policy active. This protects your death benefit and allows the cash value to grow tax-deferred over time. The policy's value can be used later for loans, withdrawals, or even estate planning. If you don’t currently need cash, maintaining the policy maximizes future benefits.
With overfunded policies like The And Asset®, you get more growth and flexibility while still protecting your legacy. Keeping your policy active supports intentional wealth building and long-term financial control.
Cashing out your whole life insurance policy involves a few straightforward steps. You must contact your insurance provider first, submit the proper paperwork, and finally receive your funds. Each step ensures you handle the process smoothly and protect your financial interests.
Start by contacting your insurance company directly. Use the customer service number or online portal listed on your policy statement. Ask about the options available to access your policy’s cash value, such as loans, partial withdrawals, or full surrender. Be ready to provide your policy number and personal identification.
Confirm any fees, tax implications, or changes to your coverage that could happen once you cash out. Your provider will explain specific steps tailored to your contract and financial goals.
Once you decide how to proceed, your insurer will ask you to complete certain forms. These often include requesting to surrender or withdraw funds and verifying your identity. Review each document carefully before submitting to avoid delays. Document submission might be done online, by mail, or in person, depending on your insurer’s process.
Keep copies of everything for your records. If you’re unsure about any paperwork, ask your insurance agent or an advisor from BetterWealth for help.
After submitting your paperwork, the insurance company processes your request. This can take several days to weeks. The payout may be sent as a check, direct deposit, or applied as a loan against your policy’s cash value.
Note that cashing out fully usually ends your policy, while loans or partial withdrawals reduce the death benefit and cash value. You may owe taxes if the amount you receive exceeds what you have paid into the policy.
Before deciding to cash out your whole life insurance policy, review how it fits with your future financial goals. Consider what other options you might have. Understanding the impact on your coverage and the potential drawbacks can help you make a clear choice.
Think carefully about how your life insurance supports your financial future. Whole life insurance not only provides a death benefit but also builds cash value over time. Cashing out means you lose the death benefit protection, which could leave your family unprotected in the event of your death. Consider if you still need the policy for estate planning, legacy goals, or tax strategies.
If the policy is part of a long-term plan like The And Asset® at BetterWealth, surrendering it might disrupt your overall wealth-building strategy. Cashing out early may reduce the total cash value you receive because of surrender charges or outstanding policy loans.
Instead of a full cash-out, explore other choices like policy loans or partial withdrawals. These options let you access cash value without ending your coverage. Loans often have low interest rates and don’t require credit checks but reduce your death benefit until repaid. You might also consider converting or adjusting your policy to better fit your current needs.
Some policies allow flexible premium payments or changing coverage types. Comparing these alternatives can help you maintain some protection while gaining access to funds.
You might consider cashing out your whole life insurance policy for several clear-cut reasons. Often, it’s about meeting urgent money needs, seizing a new investment chance, or adjusting to changes in your financial plans. Each reason affects how you handle the policy’s cash value and future benefits.
Cashing out your whole life insurance policy can provide quick funds when unexpected costs arise. This might include medical bills, urgent home repairs, or loss of income. Accessing the cash value can help you cover these expenses without taking high-interest loans. However, surrendering your policy means you lose future death benefits and the opportunity for cash value to grow.
You can also consider borrowing against the policy instead of cashing out. This option lets you access money while keeping the policy active, but you must repay the loan with interest.
You may cash out if you find a better way to grow or use your money. If a new investment offers higher returns or fits your goals better, converting your policy’s cash value to invest elsewhere might make sense. Before doing this, compare the expected gains against potential losses. Cashing out your policy stops the cash value growth and ends coverage.
You might face surrender charges or tax consequences that reduce how much money you keep. Some people use the cash to start a business, buy real estate, or fund retirement accounts. Make sure your new investment is solid and fits your risk tolerance. Always calculate costs and benefits carefully.
Over time, your financial priorities can shift. You might no longer need whole life insurance because your debts are paid or your family’s financial security is established. Cashing out lets you reallocate funds toward current goals like paying off a mortgage or funding education. Changing goals might also mean you want a different insurance or savings plan.
Cashing out can free up money for those options. However, this step could reduce your estate’s protection and the policy’s living benefits. Review your whole life insurance policy regularly. Always work with a trusted advisor to align this decision with your intentional wealth plan.
Cashing out a whole life insurance policy can bring up a lot of "what ifs." Beyond the basics, minor details can seriously impact your decision, and most people never get clear answers. Let’s clear a few of those up.
No, it won’t affect your credit score. Insurance companies don’t report loans or withdrawals from life insurance to credit bureaus. However, unpaid loans can reduce your death benefit, hurting your long-term financial strategy.
Yes, but the loan balance will be deducted from your cash payout. You’ll only receive the remaining value after subtracting any unpaid loan and interest. This can significantly reduce the actual amount you get.
Yes, most whole life policies continue earning dividends even after you take a loan. However, the loan balance may reduce how dividends are applied, some insurers calculate them based on the net cash value.
Your policy may enter a “reduced paid-up” status or use the cash value to cover premiums. This keeps your coverage active, but at a lower death benefit. Eventually, the policy may lapse if the cash value runs out.
Yes, if you are listed as the policy owner. Ownership determines control. If the policy was gifted but not officially transferred to your name, you'll need permission from the current owner to access the cash value.
No, insurers don’t ask for a reason. You can access your cash value at any time once it’s available. That said, it’s still smart to weigh the long-term impact before deciding.
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