Can you cash in a paid up life insurance policy?

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Permanent life insurance policies, such as whole life, universal life, and variable universal life, offer lifetime coverage and include a cash value component. This makes them different from term life insurance policies, which only provide coverage for a specific number of years and do not feature a cash value account. The cash value in permanent life insurance allows policyholders to access funds while they are still alive, offering a unique financial benefit alongside the death benefit.

Can you cash in a paid-up life insurance policy?

How cash value works in life insurance

The cash value in a permanent life insurance policy grows over time, and there are several ways you can access or use it. Policyholders often use the cash value to:

Withdraw money from the policy: You can also choose to partially or fully withdraw funds from the policy’s cash value, but it’s important to understand how this might reduce your death benefit.

Pay life insurance premiums: If your policy has built up enough cash value, you can use it to cover your premium payments, reducing or eliminating the need for out-of-pocket payments.

Take out a loan against the policy: You can borrow money from the cash value of your life insurance policy, typically at a lower interest rate than traditional loans, providing quick access to funds when needed.

What does it mean to be paid-up?

When your life insurance policy is paid-up, it means the cash value has accumulated enough to cover all future premium payments. In other words, your policy will remain in force without the need for you to continue paying premiums. At this point, you have the option to terminate the policy and take the accumulated cash value as a payout.

However, Frank Citera, vice president at New York Life, cautions that cashing in a fully paid-up life insurance policy is a permanent decision, and policyholders should carefully consider whether it’s the best option for their financial goals.

“Policy owners should consider whether their death benefit needs have changed and what the tax considerations of cashing in a policy may be,” he says. “If there is a gain in the policy (i.e. the cash value is greater than the total amount the client paid into the policy), the policy owner would pay taxes on the gain if the policy is cashed in.”

In addition, once you cash in the policy, your beneficiaries will no longer receive the death benefit, which could leave them financially vulnerable if they were counting on that payout. So, before deciding to cash in, it’s critical to assess whether you still have a need for life insurance coverage.

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Taking a loan as an alternative option

If you need access to cash but don’t want to terminate your life insurance policy, taking out a loan against the cash value is another option to consider. This allows you to borrow money without losing the death benefit entirely, although there are important factors to keep in mind. Citera explains that in addition to the loan amount, the policyholder will owe interest for each year the loan is outstanding on the policy. This means that the longer you take to repay the loan, the more you’ll owe in total.

Additionally, if you pass away while the loan is still unpaid, the remaining loan balance (plus interest) will be deducted from the death benefit before it’s paid to your beneficiaries. While this option can provide immediate financial relief, it’s important to fully understand the long-term impact it may have on your policy and your loved ones.

“Before cashing in or taking a loan from a policy, a conversation with a trusted financial professional can help clients understand their options,” Citera says.

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Les Masterson

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Les, a former managing editor, insurance, at QuinStreet, has more than 20 years of experience in journalism. In his career, he has covered everything from health insurance to presidential politics.