Can You Use Life Insurance While You’re Still Alive?
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Summary:
Certain types of life insurance coverage allow you to access money from your policy while you’re still alive. You’ll need to have permanent life insurance (or convertible term life insurance) and have enough accumulated cash value in the life insurance policy. Policyholders can get ahold of the money by withdrawals, loans, surrendering the policy, or selling it. You may also qualify for living benefits if you meet certain criteria.
The primary purpose of life insurance policies is to bestow a death benefit on the policyholder’s beneficiaries to give them financial security, a source of income, or help to cover funeral expenses. However, in some cases, it makes sense to tap into other life insurance benefits while you’re still alive. After all, life insurance is much more than just death benefits.
Read on to learn all about the ways that life insurance policyholders can access cash from their life insurance policy to pay down their debt, acquire financial assistance for a chronic illness, or another financial need.
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Accessing cash from your life insurance policy
If you’re having financial difficulties, paying monthly policy premipoums for life insurance can feel like a tremendous burden. But there are ways to get money from your life insurance policy while you’re still alive, and you can use that money for virtually any reason.
IMPORTANT! Remember, you can’t use these methods with term life insurance because those policies have no cash value.
Surrender it
To surrender your life insurance policy is the same thing as canceling it. When you surrender the policy, the insurance company will cancel future coverage and release all the cash value minus the surrender fees. You may even have to pay federal income taxes on some of that money.
This is a good option only if you no longer need the death benefits your life insurance coverage provides. For example, if your kids are all grown up or you have life insurance benefits through your job, you may no longer need the policy and can take advantage of the accumulated cash value.
Withdraw money
Another way to tap into your policy’s cash value is to withdraw money from it much like you would with a savings account. But keep in mind this may affect your policy premiums and reduce the death benefit.
That said, this is probably the fastest and simplest way to get cash from your life insurance policy if you’re in a financial bind.
Take out a loan
If you want to keep your policy in good standing but still take advantage of the policy’s cash value, you can take out a loan against your life insurance policy. Rules will vary depending on the life insurance company, but you may be able to borrow up to 90% of the policy’s cash value.
The nice thing about this type of loan is that it has flexible repayment terms and there’s no credit check. On the other hand, you’ll accumulate interest charges that will cut into the death benefit, and any money you don’t pay back may reduce the death benefit. It’s also important to note that you may not be eligible for a life insurance loan depending on the age and value of the policy.
Pro Tip
Loans on life insurance policies often have relatively low interest rates and might have better interest rates than other borrowing options. However, be sure to compare rates before seeking a collateral or personal loan, such as those below.
Sell the policy
If you don’t feel you have a need for the living or death benefits anymore, you may be able to sell it. This is usually a better option than just letting the policy lapse, and there are two ways to go about it.
1. Viatical settlements
This option may allow a person who is chronically or terminally ill to sell the life insurance policy to a third party so they can use the money while they’re still alive. The person who purchases the policy takes over the premiums and becomes the beneficiary. If you qualify, you can receive more than the policy’s cash value but less than the death benefit.
Eligibility for a viatical settlement depends on your health, the age of the policy, and its value. In addition, the policyholder must agree to share medical information — even life expectancy — with prospective buyers. And the buyer is sometimes allowed to check in occasionally to see how you’re doing.
2. Life settlements
Life settlements are very similar to viatical settlements, except that you don’t need to be sick. However, you usually have to be age 65 or older. In this case, you sell your policy to an investor for more than the cash value of the policy but less than the death benefit. In some cases, you might be able to get up to 60% of the death benefit.
If you need a lump sum of cash, a life settlement could be your best bet. This is because you can get more money than you would if you surrender, withdraw, or take a loan out from your life insurance policy. The investor who’s buying life insurance from you will now become the beneficiary of the policy.
IMPORTANT! If you choose to sell your life insurance policy on the secondary market, it might be a smart move to hire a third-party expert, like an attorney or an experienced broker, to make sure you get the best deal. Also, keep in mind that you’ll have to pay taxes and fees on the sale and you won’t receive the full value of the policy.
Living benefits
Living benefits are another way to make use of life insurance policies while you’re still alive. Some of these may be included with your life insurance coverage. Otherwise, you may need to purchase policy additions like living benefit riders or long-term care riders.
“Riders are like features you add to a car, but instead of leather seats and seat warmers, you’re adding things like long term care coverage and terminal illness coverage,” explains Frank Murillo, Managing Director at Snowden Lane Partners. “In essence, in the unfortunate instance that you become terminally ill or need assisted living, the benefits of the policy pay out earlier than they normally would to help cover these costs.”
Keep in mind that these living benefits are subject to certain criteria. Here are a few common living benefit riders.
- Chronic illness. Your life insurance may provide coverage if you’re diagnosed with a chronic illness and need assistance with at least two of six activities needed for daily living (ADLs), such as bathing, eating, or dressing.
- Terminally ill. If you’re diagnosed with a terminal illness and your life expectancy is reduced to two years or less, you can use this rider to pay for medical expenses or end-of-life care (depending on the policy). The benefit can also be accessed for other uses, such as to pay for a dream vacation before you pass away.
- Long-term care riders. Sometimes those who are terminally, critically, or chronically ill require extended care services, which can be very expensive. Long-term care riders, which are typically an add-on cost, provide benefits in these situations, often up to 90% of the death benefit.
When it comes time for payment, you may receive a lump sum or as-needed distributions for any of these living benefits. Depending on the benefits, you may have to pay an added cost and wait a certain amount of time between when the life insurance policy or riders were purchased and when you can access the benefits.
Pro Tip
Term policies may also offer these options for an additional cost. Regardless of your policy, the benefits used while you’re still alive will be deducted from the death benefit. To compare your options, take a look at the comparison tool below.
Should you cash in your life insurance policy?
Cashing in your policy is a personal choice that depends on your financial goals and/or your needs for coverage. For example, if you have young children, you’ll want to provide for them in the event that you die suddenly. The most immediate pro of cashing out a life insurance policy is the instant access to cash flow. But this is at the expense of life insurance coverage, which is a major con unless the individual has other coverage in place,” explains Jiten Puri, CEO of PolicyAdvisor.
On the other hand, if you’re having financial difficulties, being able to get cash out of your policy might be a convenient way to get out of a bind or pay for an emergency. Just be sure to weigh the pros and cons of selling or surrendering the policy versus borrowing or withdrawing from it.
FAQ
How do rich people use life insurance?
Wealthy people often purchase whole life insurance policies because the death benefit is generally tax-free. This means their beneficiaries can use that cash to offset estate or inheritance taxes. Buying life insurance can also be another vehicle for building wealth.
For example, if other investment accounts (such as retirement accounts) have reached their maximum contributions, insurance can be another tool to pass down tax-free wealth.
Key Takeaways
- There are several ways to access the cash value of your life insurance while you’re still living. These include taking a loan against the policy, withdrawing money from it, surrendering it, or making a life settlement.
- There are living benefits that policyholders might also be able to use if they’re terminally or chronically ill or need long-term care.
- You may need to add living benefit riders to take advantage of these life insurance options. Both permanent life insurance and term life insurance may offer these benefits.
- If you sell your insurance policy, you will be subject to federal income taxes and fees that result in less money paid to the seller of the policy.
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