Can you take money out of a life insurance policy?

Answer 1

Yes, if the policy is a whole life insurance policy. This is a type of life insurance policy that has an element of "savings" to it. That is, a part of each premium is applied to pay for the death benefit, and a part goes into the "cash value" which is roughly similar to a savings account. In the early years of the policy, the cash value accumulates very slowly, but as the policy is in force, it accumulates more rapidly.

Whole life insurance policies generally contain provisions that allow the owner to borrow the cash value. Usually, there is a percentage limit to the amount that may be borrowed, such that the entire cash value cannot be taken.

The policy will also specify a rate of interest to be charged against the money taken. While it does not have to be repaid (because it is essentially your money), the interest will continue to accrue against the loan and add to the balance payable. The risk therefore exists that the policy loan plus the accrued interest will, over time, cannibalize the death benefit such there will be a much smaller death benefit payable when the insured dies.

Term life insurance does not accumulate cash value. Therefore, a loan as described above, is not possible.