Yes — you can cash out a life insurance policy while you’re still alive. There are three ways to do it: surrender the policy to your insurance company, borrow against it with a policy loan, or sell it to a third-party buyer through a life settlement. Each option pays a different amount, works on a different timeline, and has different tax consequences. The method you choose can mean the difference between receiving $25,000 and $150,000 from the same policy.
This guide compares all three options honestly so you can decide which makes the most sense for your situation.
At a glance:
- Surrendering gives you the cash value minus fees — usually 3–5% of the death benefit. Fastest option (days).
- Policy loans let you borrow against cash value and keep coverage, but interest compounds and the policy can lapse.
- Life settlements sell the policy to institutional buyers — typically paying 4–7 times more than surrendering, but take 60–90 days and require qualification.
The Three Ways to Cash Out a Life Insurance Policy
- Surrender the policy to your insurance company
- Borrow against the policy with a policy loan
- Sell the policy through a life settlement
Each one works differently, pays differently, and has different trade-offs. Let’s break them down.
Option 1: Surrender Your Policy to the Insurance Company
The most common approach — and usually the worst deal.
When you surrender a life insurance policy, you cancel it and receive whatever has accumulated in the cash value account, minus surrender charges and outstanding loans. This is called the cash surrender value.
Why the surrender value is almost always low
The surrender value only reflects the savings portion of your policy. It completely ignores the most valuable part — the death benefit.
If you’re 78 years old with a $500,000 policy, that death benefit has real financial value. Institutional investors know a $500,000 payout is coming — the only question is when. Your policy’s true market value factors in the death benefit, your age, your health, and the cost to keep it in force. The insurance company’s surrender offer ignores all of that.
Industry data shows the average surrender value amounts to roughly 3–5% of the death benefit (LISA). On a $500,000 policy, that might be $15,000–$25,000.
When surrendering makes sense
- Your policy has a small face value (under $100,000)
- You’re under 65 and in good health
- You need money within days, not weeks
- You’ve already checked the other options and they don’t apply
When it doesn’t
If you’re over 65 with a policy worth $100,000 or more, surrendering without exploring alternatives could cost you tens — or hundreds — of thousands of dollars. The comparison table below shows why.
Option 2: Take a Policy Loan
If you need cash but want to keep your policy in force, a policy loan lets you borrow against the cash value without canceling coverage. The insurance company lends you money using your policy as collateral.
How it works
- You can typically borrow up to 90% of your cash value
- No credit check or application process
- The money is usually available within a few days
- You choose whether to repay the loan or not
The catch
Policy loans are not free money. The insurance company charges interest — typically 5–8% per year — and that interest compounds whether you make payments or not.
If you don’t repay the loan, the outstanding balance (plus interest) is deducted from the death benefit when you pass away. If the loan balance grows large enough to exceed the cash value, the policy can lapse entirely — meaning you lose the coverage and may owe taxes on the forgiven amount.
When a policy loan makes sense
- You need a relatively small amount of cash
- You want to keep the death benefit active for your beneficiaries
- You have a plan to repay the loan or are comfortable with a reduced death benefit
- The loan amount you need is well within the cash value limits
When it doesn’t
If you’re borrowing against a policy you no longer need or can’t afford to keep, a policy loan delays the inevitable while adding interest charges. In that situation, one of the other two options will likely put more money in your pocket.
Can You Withdraw Cash Value Instead of Surrendering?
Some permanent policies — particularly whole life — allow partial withdrawals from the cash value without fully surrendering the policy. This is different from both a loan and a surrender:
- Partial withdrawals reduce your cash value and your death benefit, but don’t cancel the policy
- Withdrawals up to your cost basis (total premiums paid) are generally tax-free
- Not all policy types allow partial withdrawals — universal life policies typically do, but terms vary by carrier
- There may be minimums, maximums, or fees depending on your contract
If you only need a portion of your cash value and want to keep some coverage in place, ask your insurance company whether your policy allows partial withdrawals and what the impact on your death benefit would be. This can be a reasonable middle ground for smaller cash needs.
Option 3: Sell Your Policy Through a Life Settlement
This is the option most people have never heard of — and it typically pays the most.
A life settlement is the sale of your life insurance policy to a third-party institutional buyer for a lump-sum cash payment. The buyer takes over the premium payments and eventually receives the death benefit. You walk away with a payout that is significantly more than the insurance company’s surrender offer.
How it works
- You share basic information about your policy (face value, type, your age)
- A licensed broker reviews your policy and determines if it qualifies
- The broker submits your policy to multiple institutional buyers who compete for it
- You receive offers and choose whether to accept — or walk away with no cost or obligation
The entire process typically takes 60–90 days from first contact to payment. There are no upfront costs. For a detailed walkthrough, see our guide on how to sell your life insurance policy.
What you can expect to receive
According to the Life Insurance Settlement Association (LISA) 2024 Annual Market Data Survey, seniors who sold through life settlements received an average of 6.5 times their cash surrender value — a record high. The typical payout falls between 10–25% of the face value, with an industry average around 20%.
In real terms: if your policy has a $500,000 death benefit and a $20,000 cash surrender value, a life settlement might pay $80,000–$125,000 or more, depending on your age, health, and policy type.
Across the industry in 2024, sellers collectively received $511 million more through life settlements than they would have received by surrendering — across 2,699 transactions (LISA 2024 Annual Survey).
Who qualifies
Life settlements aren’t available to everyone. The general requirements:
- Age 65 or older (strongest offers at age 70+)
- Policy face value of $100,000 or more ($250,000+ attracts the most competitive bids)
- Permanent policy type: universal life, whole life, indexed universal life, or guaranteed universal life
- Convertible term policies may also qualify — the conversion option itself has value
- Life expectancy under approximately 15 years (health changes since the policy was issued can actually increase its settlement value)
Not sure if you qualify? You can check in about 2 minutes — it’s free.
When a Life Settlement Is NOT the Right Fit
Life settlements offer the highest payout in most cases, but they aren’t the right choice for everyone. A life settlement probably isn’t a good fit if:
- You still need the death benefit. If your beneficiaries depend on the payout — to cover a surviving spouse’s living expenses, pay off a mortgage, or fund a child’s care — selling the policy removes that protection. A policy loan or partial withdrawal may be better.
- Your policy doesn’t meet the eligibility thresholds. Policies with face values under $100,000, insured individuals under 65 in good health, or standard term policies without a conversion option generally don’t attract competitive offers.
- You need cash immediately. The life settlement process takes 60–90 days. If you need funds within the next week, surrendering or a policy loan is faster.
- The settlement offer isn’t meaningfully higher than the surrender value. On certain smaller whole life policies with high cash values relative to the death benefit, the gap between surrender and settlement may not justify the longer timeline. A good broker will tell you this upfront.
- You’re uncomfortable with the process. Selling a policy requires sharing medical records with underwriters and going through a closing process. While these are standard and regulated, some people simply prefer the simplicity of calling their insurance company.
In any of these situations, one of the other options may serve you better. The important thing is to compare all three before deciding — especially before surrendering a policy that could be worth significantly more on the open market.
How Policy Types Affect Your Options
Not every life insurance policy works the same way when it comes to cashing out. Here’s a quick breakdown:
| Policy type | Has cash value? | Eligible for life settlement? | Notes |
|---|---|---|---|
| Whole life | Yes | Yes | Highest cash values, but settlement-to-surrender gap may be smaller |
| Universal life | Yes | Yes — most commonly settled type | Cost of insurance can spike with age, making these attractive to sell |
| Indexed universal life | Yes | Yes, if well-funded | Cash value tied to market index performance |
| Guaranteed universal life | Minimal | Yes — often receives strongest offers | Low premiums make these very attractive to buyers |
| Variable universal life | Yes (market-exposed) | Yes, but typically lowest offers | High internal costs reduce buyer interest |
| Term life | No | Only if convertible | Conversion option can unlock significant value |
If you’re unsure what type of policy you own, check your policy documents or call your insurance company and ask. The policy type directly affects how much cash you can access and through which method.
Side-by-Side Comparison
Here’s how all three options stack up for a typical scenario — a 76-year-old with a $500,000 universal life policy and $22,000 in cash surrender value:
| Surrender | Policy Loan | Life Settlement | |
|---|---|---|---|
| Cash received | ~$22,000 | Up to ~$19,800 | $80,000–$130,000+ |
| Keep death benefit? | No | Yes (reduced) | No |
| Timeline | Days | Days | 60–90 days |
| Ongoing costs | None | 5–8%/yr interest | None |
| Tax treatment | Ordinary income | Tax-deferred until lapse | Favorable 3-tier structure |
| Upfront cost | $0 | $0 | $0 |
| Risk | Low | Policy can lapse | Low — no obligation to accept |
If you need money fast and the amount is small, surrendering or a loan gets cash in your hands quickly. If you’re looking to get the most value from a policy you no longer need, a life settlement typically pays 4–7 times more than surrendering (LISA).
A Real-World Example
An 87-year-old woman owned a $2 million universal life policy. She was a cancer survivor, her premiums were climbing due to rising cost-of-insurance charges, and she no longer needed the coverage. Her insurance company offered a cash surrender value of $43,500.
Through a life settlement, her policy was shopped to multiple institutional buyers in a competitive bidding process. The result: $920,000 — more than 21 times what her insurance company offered.
Not every case produces that kind of multiple. But the gap between surrender value and life settlement value is consistently significant for qualifying policies. You can see more case studies on our results page.
Note: This example is drawn from actual settlement outcomes facilitated through our broker network. Individual results vary based on age, health, policy type, face value, and market conditions.
What About Term Life Insurance?
If you have a term life insurance policy, your insurance company will tell you it has no cash value — and technically, they’re right. Term policies don’t accumulate a savings component.
But that doesn’t necessarily mean a term policy is worthless.
If your term policy includes a conversion option — the ability to convert to a permanent policy without a medical exam — it may have real value in the life settlement market. The conversion privilege preserves your original health classification, which can make the resulting permanent policy attractive to institutional buyers.
Before you let a term policy expire, check whether it’s convertible. Learn more about selling a convertible term life insurance policy.
How Taxes Work When You Cash Out
Taxes are one of the most common concerns. The good news: the tax treatment is more favorable than most people expect, especially with a life settlement.
| Method | How it’s taxed |
|---|---|
| Surrender | Gain above your cost basis (total premiums paid) taxed as ordinary income |
| Policy loan | Generally not taxable unless policy lapses — then forgiven loan can trigger a tax bill |
| Life settlement | Favorable 3-tier structure: return of premiums (tax-free), gain up to CSV (ordinary income), gain above CSV (capital gains rates) |
The life settlement tax structure was clarified by the Tax Cuts and Jobs Act of 2017, which established that a seller’s tax basis equals total premiums paid — making the tax-free portion larger than under previous IRS guidance. For the full breakdown, see our guide on life settlement tax implications.
Even after taxes, a life settlement almost always nets more than surrendering.
Important: Tax rules vary by individual circumstances, and some state tax treatments differ from federal. Consult a licensed tax professional before making decisions based on the tax summaries above.
Why Do So Few People Know About Life Settlements?
If life settlements pay so much more, why doesn’t everyone do this?
Most people have never heard of them. According to LISA survey data, 55% of seniors aged 65 and older don’t know life settlements exist. And a 2010 Insurance Studies Institute survey found 90% of seniors who let a policy lapse would have considered selling if they’d known they could.
There are a few reasons for this awareness gap:
- Insurance companies don’t advertise it. When you surrender, the insurer keeps the difference between your payout and the death benefit. Only six states currently require insurers to disclose the life settlement option before allowing a policy to lapse (NAIC/NCOIL model act provisions).
- Many financial advisors don’t mention it. Nearly half of financial advisors cite lack of knowledge as the reason they don’t bring up life settlements. Some major broker-dealers have historically restricted their employees from discussing them.
- Market penetration is extremely low. Only about 2,700 policies were settled in the entire U.S. in 2024, despite an addressable market that Conning’s 2025 strategic study estimates at $224 billion annually. An estimated $37.5 billion in policy value is lost every year by seniors who lapse or surrender policies that could have been sold.
The life settlement industry has been legal for over a century — the U.S. Supreme Court established that life insurance policies are transferable personal property in Grigsby v. Russell (1911) — but awareness is still catching up.
What to Do Before Making a Decision
Before you cash out any life insurance policy, run through this checklist:
- Confirm your policy type and face value. Call your insurance company or check your annual statement. The type of policy determines which options are available.
- Request your current cash surrender value in writing. This is your baseline — the minimum you should expect from any option.
- Check whether your policy has a conversion option (if term) or partial withdrawal provisions (if permanent).
- Ask whether your beneficiaries still need the death benefit. If they do, a policy loan or partial withdrawal may be a better fit than selling or surrendering.
- Get a life settlement estimate before surrendering. This is free, takes a few minutes, and carries no obligation. If your policy qualifies, you’ll have a real market value to compare against the surrender offer.
- Consult a financial advisor or tax professional about the tax implications of whichever option you’re considering. Rules vary by state and individual situation.
The worst outcome is surrendering a policy for $20,000 when it could have sold for $120,000. The best way to prevent that is to compare all your options before making a move.
Frequently Asked Questions
Can you cash out a life insurance policy at any time?
For permanent policies, yes — you can surrender or take a policy loan at any time. For life settlements, most states require the policy to be at least 2 years old before it can be sold. Some states require 5 years.
How much cash will I get?
It depends on the method. Surrendering typically pays 3–5% of face value. Life settlements typically pay 10–25% of face value — an average of 4–7 times more. The exact amount depends on your age, health, policy type, and face value.
Can I cash out someone else’s life insurance policy?
Only the policy owner can initiate a surrender, loan, or sale. The owner and insured are not always the same person. A power of attorney may be sufficient in some cases.
Is there a penalty for cashing out?
Surrender charges may apply if the policy is relatively new (typically the first 10–15 years). Life settlements have no penalties. Policy loans have no penalties, but unpaid interest accumulates.
Can you cash out term life insurance?
Term policies have no cash value to withdraw. However, if your policy has a conversion option, it may qualify for a life settlement. See our guide on selling term life insurance.
Do I have to pay taxes when I cash out?
Generally, the portion representing a return of premiums you’ve paid is tax-free. Gains above that may be taxable. Life settlements have the most favorable tax treatment of the three options. See our full tax guide. Always consult a tax professional for your specific situation.
The Bottom Line
You paid into your life insurance policy for years — sometimes decades. If you no longer need the coverage, you deserve to know all of your options before walking away from it.
Surrendering is the default because it’s what the insurance company offers. But it’s rarely the best deal. A life settlement puts the policy in front of multiple competing buyers, and that competition is what drives the price up.
Before you decide, find out what your policy is actually worth. Request a free estimate — it takes less than three minutes, there’s zero cost, and you’re under no obligation. Or call us directly at (321) 270-0279.
This article is for informational purposes only and does not constitute financial, tax, or legal advice. Life settlement eligibility, payouts, tax treatment, and regulations vary by state and individual circumstances. Consult a licensed financial advisor, tax professional, or attorney before making decisions about your life insurance policy. Market statistics cited in this article are sourced from the Life Insurance Settlement Association (LISA) annual surveys and Conning strategic studies. Case study results reflect actual settlement outcomes; individual results vary.