Cash value life insurance is permanent life insurance, usually whole life or universal life, that builds a savings balance inside the policy along with the death benefit. Part of each premium goes into that balance, which grows over the years without tax until you take it out. While you are alive you can borrow against it, withdraw part of it (on most universal life policies), cancel the policy and take the cash (called surrendering it), or use the cash to keep a smaller policy in force with no more premiums. Anything you take reduces what your family gets when you die, and cashing out can bring a tax bill.
This guide is for people deciding whether to keep, borrow from, or cash in an older policy. It covers each option, the taxes, and the effect on SSI, Medicaid and other benefits. It is general information. It does not recommend any company or policy, and nothing here is a quote or a promise of any rate or return.
How Cash Value Life Insurance Works
Every cash value policy has two parts: the death benefit (also called the face value) and the cash value. In the early years most of your premium pays for insurance costs and commissions, so the cash value grows slowly.
The cash value grows in different ways depending on the type of policy:
| Policy type | How the cash value grows | Premiums | Main risk |
|---|
| Whole life | Guaranteed growth set in the contract. Participating policies may also pay dividends, which are not guaranteed | Fixed for life | Few surprises, but growth is slow |
| Universal life (UL) | Credited interest, with a contract minimum | Flexible | Policy can lapse if the cash value runs out to pay rising insurance costs |
| Indexed universal life (IUL) | Credits tied to a stock index, with caps and a floor | Flexible | Credits can be low for years; caps can change |
| Variable universal life (VUL) | Invested in subaccounts you choose | Flexible | Cash value can drop with the market |
| Term life | No cash value | Fixed for the term | Nothing to cash out |
Two numbers on your annual statement matter most:
- Cash value: the total balance inside the policy.
- Cash surrender value: what the insurer will actually pay you if you cancel today. It equals the cash value minus any surrender charges and any loans you owe. Universal life policies often carry surrender charges for the first 10 years or more. Older whole life policies usually have little or none by the time the owner is a senior.
If you cannot find your statement, call the insurer and ask for an "in-force illustration." It shows the current cash value, the surrender value, any loan balance, and how the policy is projected to perform if you keep paying, stop paying, or take money out.
What You Can Do With the Cash Value
| Option | What you get | Effect on the death benefit | Taxes (general rule) |
|---|
| Policy loan | Cash now, no credit check | Reduced by the loan plus interest owed | Usually none while the policy stays in force |
| Partial withdrawal (mostly UL) | Part of the cash value | Reduced, often dollar for dollar or more | Tax-free up to what you paid in premiums |
| Full surrender | The cash surrender value | Ends. Coverage is gone | Gain above your cost is ordinary income |
| Reduced paid-up insurance | No cash. No more premiums | Smaller, but paid up for life | None |
| Extended term insurance | No cash. No more premiums | Same amount, for a set number of years | None |
| Use dividends to pay premiums | Lower or no out-of-pocket premium | Usually unchanged | Generally none until dividends exceed what you paid |
| 1035 exchange | A new annuity or long-term care policy | Ends the old policy | Tax-free if done correctly |
| Accelerated death benefit | Part of the death benefit while alive | Reduced | Usually tax-free for terminal or chronic illness |
| Life settlement | A cash sale price, often above surrender value | Goes to the buyer | Part can be taxable |
Borrowing Against Your Life Insurance
A policy loan lets you borrow from the insurer using your cash value as collateral. There is no application, no credit check and no fixed repayment schedule. The insurer charges interest, and unpaid interest gets added to the loan. When you die, the insurer subtracts the loan and unpaid interest from the death benefit before paying your family. And if the loan plus interest grows larger than the cash value, the policy can lapse. A lapse with a loan outstanding is one of the worst outcomes: your coverage ends and you can owe income tax on the gain, even though you received no cash at the end. The insurer will send a Form 1099-R.
Before borrowing, ask the insurer: what interest rate applies, whether it is fixed or variable, and how many years until the loan would cause a lapse if you never paid anything back.
Partial Withdrawals
Most universal life policies let you withdraw part of the cash value without a loan. Whole life policies usually do not allow plain withdrawals, though you can often surrender paid-up additions bought with dividends. Withdrawals from a regular policy are generally tax-free up to your cost, the total premiums you paid. A withdrawal permanently lowers the cash value and usually the death benefit, and taking too much can push a universal life policy toward lapse.
Cashing Out (Surrendering) a Whole Life Policy
Yes, you can cash out whole life insurance. You send the insurer a surrender form, the coverage ends, and the insurer pays you the cash surrender value. State nonforfeiture laws require whole life policies to have a guaranteed surrender value once the policy has been in force for a few years.
Surrendering is permanent, and at an older age new coverage may cost far more or be unavailable. Compare the surrender value to what the policy would pay your family, and ask whether a cheaper option below (such as reduced paid-up insurance) gets you most of what you want.
Keeping Coverage Without Paying More Premiums
If the problem is the premium, not a need for cash, whole life policies give you two built-in choices besides surrender:
- Reduced paid-up insurance: the cash value buys a smaller policy that is fully paid for life. No more bills, and some death benefit stays in place.
- Extended term insurance: the cash value buys term coverage for the full face amount, for as many years and days as the cash will pay for. When that period ends, the coverage ends.
Many policies switch to extended term automatically if you simply stop paying, so call the insurer before you stop paying. If your policy pays dividends, you can also ask to have them applied to the premium.
1035 Exchange to an Annuity or Long-Term Care Policy
Section 1035 of the tax code lets you swap a life insurance policy for an annuity or a qualified long-term care insurance policy without paying tax on the gain at the time of the swap. The exchange to long-term care coverage has been allowed since 2010 under the Pension Protection Act of 2006. The money has to move directly from the old insurer to the new one, and the owner has to be the same on both contracts. If you cash out first and then buy the new product, the gain is taxable. The new product comes with its own fees, surrender period and health questions, so get a second opinion from someone not earning a commission on the swap.
Accelerated Death Benefits
Many policies let you collect part of the death benefit early if you are terminally ill, and some also do so for chronic illness or a need for long-term care. The IRS says these payments are fully excluded from income for a terminally ill person (certified by a doctor as expected to die within 24 months), and excluded within limits for a chronically ill person. Check your policy for a rider, or ask the insurer whether one can be added.
Selling the Policy (Life Settlement)
A life settlement is the sale of your policy to a third-party buyer, who pays you a lump sum, takes over the premiums, and collects the death benefit later. Buyers mostly look at older owners and larger policies, and the price can be more than the surrender value. A sale to a buyer when you are terminally or chronically ill is called a viatical settlement. Most states regulate settlements and require the buyer or broker to be licensed, so check with your state insurance department first. Part of the sale price can be taxable, and the money you receive can count against SSI and Medicaid limits.
How Cash Value Withdrawals Are Taxed
The basic rule comes from the IRS: if you surrender a policy for cash, you must include in income the amount above your cost. Your cost is generally the total premiums you paid, minus any premiums refunded, dividends you received in cash, or other amounts you got back tax-free. The insurer reports the payment on Form 1099-R, and the taxable part is ordinary income, not a capital gain.
Here is a worked example with made-up numbers:
| Item | Amount |
|---|
| Total premiums paid over 25 years | $18,000 |
| Dividends taken in cash over the years | $2,000 |
| Your cost in the policy | $16,000 |
| Cash value at surrender | $21,000 |
| Taxable gain | $5,000 |
Now say you also owed an $8,000 policy loan. The insurer pays off the loan from the cash value and sends you a check for $13,000. Your taxable gain is still $5,000, because the paid-off loan counts as money you received.
Modified endowment contracts (MECs): if a policy was funded faster than tax law allows (it failed the "7-pay test"), it is a MEC. Loans and withdrawals from a MEC are taxed gains first, and the taxable part can carry an extra 10% tax if you are under age 59½. Your statement or the insurer can tell you whether your policy is a MEC.
The death benefit your beneficiaries receive is generally not subject to income tax. Ask a tax preparer about your own situation before you take a large amount out.
How Cash Value Affects SSI, Medicaid and Other Benefits
Cash value is something benefit programs may count as a savings asset. The rules differ by program:
| Program | Does cash value count? | Limit to know |
|---|
| SSI | Yes, if the total face value of all policies on a person is over $1,500. Then the cash surrender value counts | $2,000 in countable resources for one person, $3,000 for a couple |
| Medicaid for people 65+ or disabled | In most states, rules similar to SSI. Varies by state, especially for nursing home care | Set by your state |
| SNAP (food stamps) | No. Federal rules exclude the cash value of life insurance | Not applicable |
| Extra Help (Medicare Part D) | No, for applications filed since January 1, 2010 | 2026: $18,090 single, $36,100 married |
| Medicare Savings Programs | Varies by state. Some ignore life insurance, others count it | 2026 federal floor: $9,950 single, $14,910 married |
For SSI, the regulation (20 CFR 416.1230) also says term insurance and burial insurance do not count toward the $1,500 face value test. Medicare Savings Program and Extra Help limits change each January, and the 2027 figures had not been published when this page was written.
Two traps to know about:
- Cashing out does not make the money disappear. If you surrender a policy, the check counts as income or resources once it is in your bank account. Spending it on the right things (for example, an irrevocable funeral plan) can help, but the rules are specific.
- Giving the policy away can backfire. Transferring ownership to a child within the 60-month look-back period before applying for Medicaid nursing home care can cause a penalty period.
For the full rules on SSI and Medicaid, including the $1,500 burial fund exclusion and how it interacts with life insurance, see our guide on how life insurance affects SSI and Medicaid. For food stamps, see life insurance and SNAP.
Step-by-Step: Deciding What to Do With an Old Policy
- Find the policy and the insurer. If the company was bought or merged, your state insurance department can help you trace it.
- Request an in-force illustration and a current statement. Get the cash value, surrender value, surrender charges, loan balance, loan interest rate, dividend history, and whether the policy is a MEC.
- Ask for your cost basis. The insurer can tell you your total premiums paid and any dividends paid out, which tells you the taxable gain if you surrender.
- Name the goal. Do you need cash, relief from premiums, money for long-term care, or a benefit for your family? The answer points to a different option.
- Check benefits first. If you get or may apply for SSI, Medicaid or a Medicare Savings Program, find out how the cash value counts now and how a surrender or sale would count before you act.
- Compare at least two options in writing. For example, the surrender value versus reduced paid-up insurance, or a loan versus a withdrawal.
- Get a review. A licensed insurance agent can read the policy and run the numbers. A fee-only financial planner or tax preparer can give a second view that is not tied to selling you anything new.
If you are weighing whether to keep coverage at all, our life insurance for seniors guide compares the main policy types. If the goal is just paying for a funeral, see final expense insurance and burial insurance.
Frequently Asked Questions
How does cash value life insurance work?
Part of each premium you pay goes into a savings balance inside the policy. That balance grows over time without tax, through guaranteed growth, interest, index credits or investments depending on the policy type. You can borrow against it, withdraw from it (on most universal life policies), or cancel the policy and take it. When you die, your beneficiaries get the death benefit, minus any loans you still owe.
Can you cash out whole life insurance?
Yes. You can surrender the policy and the insurer pays you the cash surrender value, which is the cash value minus any surrender charges and loans. The coverage ends. Any amount above the premiums you paid is taxable as ordinary income.
Is borrowing against life insurance a good idea?
It depends on whether you can repay it and how much death benefit you need. A policy loan is easy to get and has no credit check, but interest builds up, the loan is subtracted from the death benefit, and a loan that grows past the cash value can cause the policy to lapse with a tax bill. Ask the insurer how long the policy would last if you never repay.
Does the cash value of life insurance count against SSI?
It can. If the total face value of all life insurance on a person is over $1,500, SSI counts the cash surrender value as a resource, and countable resources must stay at $2,000 or less for one person ($3,000 for a couple). Term insurance and burial insurance do not count toward that $1,500 test.
Does life insurance cash value affect food stamps?
No. Federal SNAP rules exclude the cash value of life insurance policies from resources. If you surrender the policy, though, the cash you receive can count.
What happens to the cash value when I die?
On a standard whole life policy, your beneficiaries get the death benefit, not the death benefit plus the cash value. The cash value is part of what funds the death benefit. Some universal life policies have an option that pays both, at a higher cost.
