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Can I cash in my life insurance policy?

With life insurance, you pay monthly premiums so your survivors receive compensation after your death. Over the decades, you may pay many thousands of pounds in premiums for that policy, so you might be wondering: Can I access some of that cash while still living?

With term life insurance policies, which are the most prevalent and affordable, you can’t cash the policy in. If you (fortunately) don’t die within the term of the policy, that money won’t be recovered. You’ve simply paid for the security that, should you have passed away during that period, your family would have been taken care of.

But whole of life insurance policies, also called assurance, are different. Unlike term life insurance policies, whole of life insurance will pay out no matter when you die. Most of these policies have an investment element and accrue a cash value, equal to all the premiums you’ve paid plus the returns they've earned.

Your beneficiaries will receive this money when you die, even if it's decades from now. But sometimes people wish to tap into the cash value while they're still living, to fund their retirement or care as they age. 

Many whole of life insurance policies allow you to do this, either by borrowing against the policy or surrendering it. However, you may face steep financial penalties for doing so.

Some whole of life insurance providers allow you to borrow money against your family's eventual payout. These arrangements work like loans: your insurer charges interest and you’re asked to pay the loan back over an agreed term. Any debt that remains unpaid at your death will be taken off the value of the death benefit.

You can also withdraw all your funds from the policy, known as surrendering the policy. In doing so, you’re accepting that your beneficiaries won’t receive a payout when you die. Additionally, you’ll face penalties charges that will reduce the amount you receive. These can be substantial: in some cases, you will receive less for cashing in the policy than you paid in premiums.

If you surrender your policy, you won’t be liable for tax on the part of the fund that comes from your premiums. But any gains you made through the investment part of the policy are taxable.

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