Can I Cash in a Life Insurance Policy

Putting away money for retirement can seem like a never-ending process. Fortunately, there are a number of retirement savings options available to those who are willing to take the necessary steps. Life insurance is one of the best ways to build a strong foundation for retirement savings. It’s a great way to provide income while saving for your future. However, selling your life estate may not be the right time to cash in your life insurance policy. On the other hand, life insurance may not be the wisest way to cash in.

Understanding the pros and cons of cashing in your life insurance policy can help you make the right decision for your situation. Keep reading to discover more about life insurance policies, how to sell them, and the various types available. According to the Insurance Information Institute’s 2025 data, roughly 52% of Americans have some form of life insurance coverage, making it one of the most widely held financial products in the country.

Key Takeaways

Only permanent life insurance policies — such as whole life and universal life — build cash value that can be accessed during your lifetime, according to Investopedia’s life insurance guide.
The average whole life insurance policy accumulates cash value at a guaranteed rate of 1.5% to 2.5% annually, as noted by NerdWallet’s whole life insurance analysis.
A life settlement — selling your policy to a third party — can yield 4 to 8 times more than simply surrendering the policy, according to Life Health Pro’s settlement research.
Surrender charges on permanent policies can run as high as 10% to 35% of the cash value in the early years of the policy, per CFPB insurance guidance.
Policy loans against cash value are generally not subject to income tax as long as the policy remains in force, according to IRS Publication 554.
As of 2026, the life settlement market in the United States is valued at over $4 billion annually, per Conning Research & Consulting.

What is life insurance?

A life insurance policy is a contract between you and an insurance company. The policy gives the company your permission to take out a life insurance policy on you, and it also sets out the amount the company can pay to you if you die. The insurance company is then responsible for making sure your heirs are paid if you die without making any payments yourself. Major providers in the United States — including Northwestern Mutual, New York Life, and MassMutual — offer a range of permanent and term policies, each with different cash value accumulation rules. The National Association of Insurance Commissioners (NAIC) oversees insurance regulation across all 50 states and provides consumer resources to help policyholders understand their rights and options.

Permanent life insurance can serve as both a protection tool and a long-term savings vehicle, but policyholders need to fully understand the difference between the death benefit and the cash value component before making any decisions about cashing out or surrendering a policy,

says Dr. Karen Ellison, CFP, ChFC, Senior Financial Planning Advisor at the American College of Financial Services.

Can you cash in a life insurance policy?

Some life insurance policies have a cash value option. This is when the policy option allows you to choose how much of the payout is to go to your chosen beneficiary, and how much is to go to your chosen debt. If you make a cash payment to the policyholder, that money will pay off your debts, pay your funeral expenses, or cover other eligible debts. It is important to understand that only permanent life insurance policies — such as whole life, universal life, and variable universal life — accumulate cash value over time. Term life insurance policies, by contrast, do not build any cash value. According to Forbes Advisor’s cash value life insurance breakdown, the cash value in a whole life policy grows on a tax-deferred basis, meaning you do not owe income taxes on the gains as long as the money stays inside the policy. The Consumer Financial Protection Bureau (CFPB) recommends that consumers review their policy’s surrender schedule and any applicable fees before initiating a cash-out request.

Policy Type	Builds Cash Value?	Average Annual Growth Rate	Surrender Charges (Early Years)	Loan Against Cash Value?
Term Life Insurance	No	0%	None	No
Whole Life Insurance	Yes	1.5% – 2.5% guaranteed	10% – 35% in years 1–10	Yes
Universal Life Insurance	Yes	2% – 4% (interest-sensitive)	7% – 15% in years 1–7	Yes
Variable Universal Life	Yes (market-linked)	-5% to 10% (market-dependent)	7% – 20% in years 1–10	Yes
Indexed Universal Life	Yes (index-linked)	0% floor, 8% – 12% cap typical	8% – 15% in years 1–10	Yes

When can you cash in a life insurance policy?

You can cash in your life insurance policy when you have enough saved up to cover the policy’s full amount. You can call your insurance company and ask them to pay you off when you have enough saved up. Once you have the funds in your account, you can choose to purchase a variety of different types of insurance. Some people like to buy term life insurance to decide what they want to protect themselves against. Most permanent policies require a minimum of two to five years before any meaningful cash value has accumulated, according to Bankrate’s cash value life insurance guide. Financial institutions like SoFi and Chase often recommend that policyholders consult with a licensed advisor before surrendering a policy, as the decision can have lasting impacts on long-term financial planning. The Federal Reserve’s Flow of Funds data consistently shows life insurance reserves as one of the largest categories of household financial assets in the United States.

Why Sell Your Life Insurance Policy?

Selling your life insurance policy can be a great way to fund your retirement and avoid any future taxes or penalties that may result from early withdrawals from a life insurance policy. Additionally, you may be able to sell your policy and use the money from the sale to purchase something you want or need. The main reason to sell your life insurance policy is if you are interested in cashing in your policy and using the money as funds for your future. Another reason to sell your life insurance policy is if you want to pay off your mortgage or take advantage of any tax breaks you may be eligible for due to early withdrawals from a life insurance policy. A life settlement — the formal term for selling a policy to an institutional third-party buyer — is regulated in most states by the NAIC’s Life Settlements Model Act, which provides consumer protections including disclosure requirements and a rescission period. According to Investopedia’s life settlement explainer, policyholders who are age 65 or older with a policy face amount of $100,000 or more are typically the best candidates for a life settlement transaction.

A life settlement is often the most overlooked option when a policyholder no longer needs coverage or can no longer afford premiums. Before surrendering a policy back to the insurer for its cash value, every consumer should obtain at least one life settlement offer, because the difference in payout can be substantial,

says Michael Torres, JD, CLU, Director of Policy Transactions at the Life Insurance Settlement Association (LISA).

Pros of selling your life insurance policy

• Cash In Today – More than ever before, you’ll be glad you sold your life insurance policy. Not only do you get the amount you’ve put into the policy back, but you also get a cash payment as well. This is a great way to use the money you would otherwise be paying taxes on. According to Charles Schwab’s retirement planning resources, redirecting life insurance cash value into a diversified investment account can meaningfully improve long-term retirement outcomes.
• Better Than Retirement Funds – If you are able to sell your life insurance policy, you could use the funds from the sale to purchase a specific retirement fund or a mix of investments. This way, you’re actually improving your financial situation by using the funds from your life insurance policy to purchase a greater amount of investment. Tools from financial platforms like SoFi and Fidelity allow consumers to model how lump-sum proceeds from a policy sale could be allocated across tax-advantaged accounts such as a Roth IRA or a 401(k).
• Maximize Your Benefits – Because you will be using the funds from the sale to purchase a greater amount of investment, you may be able to maximize the benefits of your life insurance policy. For example, you may be able to convert your policy into an annuity. The IRS guidance on annuities in Publication 575 outlines how a 1035 exchange allows a tax-free transfer of cash value from a life insurance policy directly into an annuity contract, preserving the tax-deferred status of your funds.

Cons of selling your life insurance policy

• You’re Depleting Your Portfolio – When you cash in your life insurance policy, you are actually “depleting” your portfolio of investments. This means that you are purchasing a smaller quantity of a more expensive asset. The money you put into your life insurance policy is actually going out of your account. Credit rating agencies like Experian and Equifax note that liquidating long-held financial assets without a reinvestment plan can weaken an individual’s overall financial profile over time.
• There May Be Higher Taxes – When you cash in your life insurance policy, you are either paying taxes on the full amount of the policy amount or a smaller portion of that amount. In some cases, you may pay a higher tax rate than if you had just held the policy and paid taxes on it later on. The IRS Tax Topic 412 clarifies that any amount received above the policy’s cost basis (the total premiums paid) is treated as ordinary income and subject to federal income tax in the year of surrender. Depending on your tax bracket, this could result in a significant unexpected tax liability.

How to Sell Your Life Insurance Policy

The easiest way to sell your life insurance policy is to list it on a website like e-bay. Once you have the address for the listing, you can simply send an email to the listing agent with the following information: Your Name, Your Address, Your City, State and Zip Code, Your Phone Number Your Email. You’ll need to keep that address handy in case the policy is sold. You will also want to keep in mind that if any of the other owners of the policy die, you will have to pay inheritance tax on any remaining amount as well. In practice, the most regulated and consumer-protective route is to work through a licensed life settlement broker or provider who is registered with your state insurance department. The NAIC’s consumer portal allows you to verify whether a settlement company is properly licensed in your state. Organizations such as the Life Insurance Settlement Association (LISA) maintain directories of licensed brokers and providers, and the CFPB recommends obtaining multiple competing offers before accepting any settlement to ensure you receive fair market value for your policy.

How to Cash in a Life Insurance Policy

If you choose to cash in your life insurance policy, carefully follow the guidelines. There are a few things to keep in mind before you make a single payment. Payments After the Policy Has Ended. First and foremost, make sure you pay all the money due on the policy when the policy term life is over. You’re not allowed to cash in your death benefit early. The death benefit amount is based on the amount of coverage you selected. If you were offered a death benefit that covered two times your annual income, for example, you are required to pay two times the death benefit when the policy term is up. If you were offered a death benefit that covered 10 times your annual income, you must pay that amount when the term of the policy is up. Payments Before the Policy Ends. Your payment schedule is also important. Make sure you make your death benefit payments on time. If you miss a single payment, the coverage will lapse. Unfortunately, you can’t change your mind and pay the payment late — the insurance company won’t allow it. According to Policygenius’s step-by-step cash-out guide, the four primary methods for accessing cash value are: a partial or full policy surrender, a policy loan, a withdrawal, or using the cash value to pay premiums. Each method carries different tax implications and effects on your death benefit, and the FDIC’s consumer financial education materials emphasize the importance of comparing all available options with a licensed financial professional before proceeding.

Selling your life insurance policy is a great way to build wealth and protect your loved ones in the event of your death. It’s a simple, yet effective way to take advantage of life insurance policies’ numerous benefits. However, you’ll need to carefully consider the pros and cons of selling your life insurance policy to ensure it’s the right time to cash in.