Life insurance is primarily for your beneficiaries, not you. However, as a policy owner, there are several ways to use life insurance while you’re still alive.
In this guide, we’ll explain different ways to access life insurance while living and if it’s worth it.
How to Use Life Insurance While Alive
A life insurance policy’s primary function is to leave cash behind for your loved ones to claim. Depending on the type of life insurance you have, you can also access some extra benefits while you’re alive.
Term Life Insurance
Term life insurance is excellent for families because:
- It’s simple
- It’s typically a budget-friendly
When you buy a term policy, you choose how long you want the coverage to last (10-40 years) and how much coverage you want.
If you die during that period, your beneficiaries receive a death benefit check equal to the coverage amount. If you outlive the policy, you can let it expire or choose to convert or renew it.
Term life insurance is simple financial protection for your loved ones.
There aren’t many fancy features and extras, but some term policies include riders with living benefits you can access while living.
Permanent Life Insurance
Permanent policies won’t expire as long as you live. In other words, it’ll pay a death benefit no matter when you die.
There are several types of permanent life insurance with a range of coverage options.
Whole and universal life insurance are two excellent options for those who want more benefits from their policy while living.
Both have a saving component that accumulates cash value over time. As the policyowner, you can use these funds however you please. Beyond that, they’re quite different.
Whole life insurance features include:
- Fixed premiums, so rates never change
- Cash value grows at a guaranteed rate
- Guaranteed death benefit
- Earn dividends with participating policies
Universal life insurance features include:
- Adjustable death benefits
- Cash value grows based on market rates, not guaranteed rates
- Premium payments are flexible (if you skip payments, premiums will increase later)
- Cash value can be used to pay premiums
Like term life insurance, permanent policies include riders that have living benefits. But due to the cash value account, you can also use permanent life insurance policies while you’re living even further.
Using Term Life Insurance While Living
The only way you can use a term life insurance policy while alive is if you have a rider that allows you to use some of the death benefit ahead of time.
A life insurance rider is an add-on you can get with your policy to customize it with extra benefits.
Most riders have a small fee, but some, like an accelerated death benefit rider, are included at no charge.
Riders that allow you to use the death benefit ahead of time are said to have “living benefits.” Specific events typically trigger when you can access these living benefits.
These are living benefits riders you can get with a term policy:
- Terminal Illness Rider: With this rider, if you are diagnosed with a terminal illness, you can request a portion of your policy’s death benefit to use however you wish. This rider is often called an accelerated death benefit rider.
- Chronic Illness Rider: With this rider, if you’re diagnosed with a chronic illness, such as Alzheimer’s, or unable to perform two out of six activities of daily living (ADLs), you can request a portion of your policy’s death benefit to use however you wish.
- Critical Illness Rider: With this rider, if you’re diagnosed with a critical illness, such as cancer or stroke, you can request a portion of your policy’s death benefit to use however you wish.
When these riders are used, the benefit amount you request will be deducted from your policy’s death benefit, reducing the amount your beneficiaries receive upon your death.
See what you’d pay for life insurance
Using Permanent Life Insurance While Living
With permanent life insurance, there are quite a few different ways to access the policy while you’re alive.
Like term life insurance, permanent policies also offer terminal, chronic, and critical illness living benefit rider options.
An additional living benefit rider available for permanent policies, and not term, is a long-term care rider.
- Long-Term Care Rider: If you cannot perform two out of six ADLs, this rider enables you to access your death benefit to pay for expensive long-term care needs. Like other living benefits riders, the amount you use is deducted from your beneficiary’s death benefit.
Accessing the Cash Value
If a life insurance policy has a savings account that earns interest, it’s called cash value life insurance. When you pay the policy’s premiums, some money goes to cover the cost of protection, and some money is funneled into the cash value account.
Policies that build cash value include:
- Whole Life Insurance
- Universal Life Insurance
Depending on the policy you own, accessing this cash value can be done via loans or withdrawals.
Taking Out a Loan
With both whole and universal life insurance, the policy owner can take out loans against the cash value. It takes a few years to accumulate enough money to borrow, but it’s a straightforward process once you do.
It’s your money, so you can request a loan for any reason and use it however you want. The insurance company quickly sends you a check and uses your cash value account as collateral.
Here’s what you need to know about a policy loan:
- It’s tax-free and confidential
- It doesn’t affect your credit
- Technically, you don’t have to pay it back while your alive
- It does accrue interest
- If you don’t pay it back before your death, the balance is taken from the death benefit
In addition, if the accruing interest on the loan ever causes the total balance to exceed your policy’s cash value, your policy will lapse and terminate. It’s recommended, though not required, that you make a repayment plan to ensure the loan balance doesn’t become unmanageable.
Making a Withdrawal
With a universal life insurance policy, you have the policy loan option and a withdrawal option. A withdrawal is similar to a policy loan except that you’re permanently subtracting this amount from your policy. You can’t pay it back. Your beneficiary’s death benefit is forever reduced.
The benefits of withdrawing are that the amount you take out does not accrue interest, and you can withdraw tax-free up to an amount equal to the total amount of premiums you’ve paid thus far.
Wondering if you should borrow against your life insurance policy? Learn more pros and cons of withdrawals and policy loans.
Cashing Out Your Policy
You can cash out a life insurance policy while alive if it has accumulated a surrender value.
Cash value life insurance policies have a surrender value. You receive this amount if you decide to terminate/surrender your policy. A policy surrender is sometimes called a complete withdrawal.
Many insurance companies only allow cash surrenders after a certain number of years have passed, typically three years. And depending on how long your policy has been active, there may or may not be a surrender fee. Usually, once ten years have passed, the surrender fee drops off.
Also, if you have a loan balance, this amount is first deducted from the cash value before totaling your surrender value. If the surrender value exceeds the total amount of premiums paid, you’ll owe taxes on the difference.
If you decide to cash out your policy, here’s what happens:
- The insurance company sends you a check
- Your coverage is canceled
- The insurance company is no longer obligated to you
Selling Your Policy
If you have a cash value life insurance policy, you may be able to sell it to a third party. There are two possible options:
- Selling your policy for a viatical settlement
- Selling your policy for a life settlement
What’s a viatical settlement?
If you are terminally or chronically ill, you can sell your policy to a viatical settlement company for cash. They’ll pay you a lump sum—the settlement—and become the policy owner. They pay the premiums and collect the death benefit when you die.
What’s a life settlement?
If you no longer want your policy, a life settlement provider may offer to buy it, be the owner, pay the premiums, and collect the death benefit when you die. The sale amount is more than the surrender value but less than the death benefit.
Learn more about selling a life insurance policy and the pros and cons of life insurance settlements.
Should You Use Your Life Insurance Policy While Alive?
You purchase life insurance to leave money behind for your loved ones. So, carefully consider the pros and cons of accessing your policy while alive since it can affect what your beneficiaries receive.
Using living benefits
- Pro: You receive tax-free funds for a crucial time in your life, e.g., a critical, chronic, or terminal illness, or long-term care.
- Con: It permanently reduces the amount your beneficiaries receive.
Getting a policy loan
- Pro: Quick process. No income tax. Lower interest rate than banks. No mandatory repayment plan.
- Con: Balance accrues interest. Will reduce your beneficiary’s benefit if not paid back. Policy terminates if loan balance grows greater than cash value.
- Pro: No interest. Quick process. Tax-free up to a certain amount. Don’t need to pay it back.
- Con: Permanently reduces the benefit your beneficiary receives. Taxable if the amount is more than premiums you’ve paid.
Cashing out your policy
- Pro: Quick process. No longer have premium payments to make.
- Con: Your beneficiaries no longer have financial protection. You’re taxed on any amount greater than total premiums paid.
Selling your policy
- Pro: Lump sum payment can be substantial. No longer responsible for paying premiums.
- Con: Your beneficiaries no longer have financial protection.
In most cases, it’s best to leave your policy’s cash value untouched. That way, you’re more likely to avoid risking your beneficiary’s financial future.
If you no longer need life insurance, many of these options can be very beneficial.
Visit Our Blog for More Expert Life Insurance Advice
Life insurance is a great financial tool. Term life insurance is affordable protection for your loved ones and can be customized to fit your needs. Permanent life insurance can last your lifetime and has extra features policy owners may find appealing.
Both types of life insurance, especially permanent, can be confusing if you’re new to life insurance. Our blog has many educational guides and articles that can help you, whether you’re starting to shop for life insurance or are already a policy owner.
If you’re wondering how much life insurance will cost, get a free quote today. No contact information is required—no obligation to purchase.