Life insurance can be cashed out through a policy loan, withdrawal, or either a full or partial policy surrender, according to Investopedia. The policyholder also has the option of selling his policy for money, which is known as a life settlement.
The amount of money that can be withdrawn from a life insurance policy depends on the insurance company and the policy type, notes Investopedia. One main benefit of a cash-value withdrawal is that as long as the policy isn't a modified endowment contract, it isn't taxable up to the policyholder's basis.
Disadvantages of cashing out a life policy include reducing the policy's cash value, risking the withdrawal being subject to taxation, and a possible increase in insurance premiums, says Investopedia. The policyholder might also incur a 10 percent fee for an early withdrawal if he is younger than 59 when the withdrawal is made.
A person can also borrow money from his life insurance policy by using his cash-accumulation account as collateral, according to Investopedia. There's a chance the loan may incur interest. The amount that can be borrowed is dependent on the policy's terms and the total value of the policy's cash-accumulation account. While interest may be applied to the outstanding loan balance, borrowed money from non-MEC policies can't be taxed.