How Can I Use Life Insurance While Alive?

At its core, the main purpose of life insurance is to provide income replacement in the event an unexpected death occurs. That is why most people only view life insurance as a way to leave money behind to their beneficiaries. However, depending on the type of life insurance policy you have, you could actually leverage it to help you financially while you are still alive.

Whether its a permanent policy that builds cash value that can be borrowed against or a term policy with built-in feature that give you access to money for certain health related conditions, it’s important to understand all the benefits that come with a life insurance policy so you can make sure you are getting the coverage that will best suit your needs now and in the future.

So. if you're wondering how life insurance can be used while you’re still alive, keep reading for everything you need to know.

Depending on the type of life insurance policy, you can most certainly leverage it while you're still alive.

For example, one type of life insurance policy that can be used while alive is a permanent or whole life policy. These policies build cash value over time and a portion of it can be borrowed against and used for any reason. You can also decide to surrender the policy altogether, taking out all of the cash that built up, but that would leave you without a life insurance policy in place.

Leveraging cash value isn’t the only way you can use a life insurance policy while alive. Many times, policies include living benefit riders that are designed to provide you access to cash for specific reasons such as needing long-term care services.

Living benefit riders can be part of a term policy or a whole life so it’s always important to look at all the details when buying life insurance coverage.

Policies that accumulate cash value provide the policyholder access to the funds that can be used while they are still alive. This is typically in the form of withdrawals or loans. Alternatively, they may be able to sell or surrender the policy.

When someone refers to “cashing out" a policy, it typically means they are taking money out of the life insurance policy to use for things such as taking a vacation, or helping to fund their retirement.

You can only cash out permanent policies since term policies do not build any cash value. However, you might be able to convert a term policy into a type of permanent life insurance called "convertible term life insurance". This type of policy may provide access to cash value once it has a chance to accumulate.

It’s important to remember that any money being cashed out of a life insurance policy will be deducted from the total death benefit your beneficiaries will receive, unless you pay it back.

When it comes to using your life insurance policy as an investment, there are 3 main ways this can be accomplished.

1. Accessing the cash value through a loan, withdrawals, or surrendering the policy
2. Applying for living benefits
3. Life settlements

How you use your policy will depend on your specific situation and the type of policy you have. It will also depend on what your financial goals are and how the money will be spent.

1. Cash Value Through Loans, Withdrawals, or Surrenders

Most people choose to tap into the cash value of their policy. You can do this if you have permanent life insurance, and there are three ways to go about it.

Many life insurance providers will let you take out a loan against the cash value that you've accumulated in your policy. These loans build interest, but unlike typical loans, they don't have set repayment schedules. Instead, the interest charges will have an effect on your death benefit.

If the money you owe is still outstanding upon your death, it will be deducted from the benefit amount. This means that the payout will be smaller than expected.

Withdrawals allow you to access the cash value similarly to a savings account. You can take money out and there are no interest charges. This is typically the quickest and easiest way to access money - but it's not always the best choice.

Taking money out can affect your policy, both in terms of your premiums and your benefits. This can impact the long-term growth potential of your policy resulting in a smaller payout upon your death. It's important to understand how your policy will be affected before doing this.

Surrendering a policy is essentially the same as canceling it. If you do this you'll receive the entire cash value of your policy (note that there will likely be some fees to cover the process).

You should only do this if you're confident that you no longer need to be covered. Depending on your policy, you might face a penalty for cashing out early. If the payout is more than the total amount of the premiums you've paid, you might also owe income tax.

Term life insurance policies don't accumulate cash value. Because of this, you can only cash out on one if you convert it to a permanent policy.

2. Apply for Living Benefits

Some life insurance policies allow the policyholder to take cash out for certain living benefits. You can typically take out a portion of up to 50% in advance, depending on certain criteria. Your policy will have details about the specific requirements for this.

It's important to note that most policies come with these benefits as standard - but not all. Make sure you thoroughly review the terms of your policy so that you know what you will and won't be eligible for.

A chronic illness is one that someone suffers from over a long period. In most cases, someone who has a chronic illness will need some kind of assistance - generally with at least 2 ADLs (activities of daily living) such as eating, dressing, or bathing. Such care can cause a financial drain, so you may be able to cash out a portion of your policy to help cover these expenses.

Healthcare is rarely cheap, so anyone that needs long-term care will be facing sizable expenses for quite some time. Depending on your life insurance policy, you may be able to receive cash in the form of a long-term care rider. This will help cover the costs of long-term care.

The payout for a life insurance policy is typically reserved for after death, but if someone has been diagnosed with a terminal illness, they can receive living benefits and cash in their policy in advance to help with the financial hardships that lie ahead. This applies to anyone with a life expectancy of 12 months or less.

3. Sell the Policy

The final option for those wishing to cash out their life insurance policy is to sell it through a life settlement. Third-party investors may be willing to pay a cash sum to purchase your policy.

Doing this will generally get you a lot more money than surrendering your policy or letting it lapse, so it may well be the best option for you. You should only do this, however, if you no longer need the death benefits that come with your policy.

A third-party investor will likely pay you more than 50% of the death benefit as a lump sum of cash. You can then use this in whatever way you want.

The main downside here is that you'll get a fair amount less than the value of the death benefit. On the plus side, however, it gets you more than the other options available. It may even result in you getting up to 10 times as much as you would from surrendering your policy.

This is the best option to maximize your ROI from your policy. Because of this, it's almost always the most suitable choice for anyone who no longer needs the death benefit to help support their family.

Note that you also have to meet certain requirements for this. In most cases, you must be at least 70 years old and need to have a whole, variable, universal, or convertible term policy.

When cashing out your policy, there are some things you want to check and consider first to ensure it's the best choice. If you don't, you might end up unnecessarily losing out on money.

Is There a Penalty Charge?

There may be a fee when selling or surrendering a policy, so make sure you know all the details first. They can be as high as 35%-40% for some policies, so be cautious.

How Much Will I Receive?

When surrendering your policy the amount of money you receive will be determined by how much cash value has accumulated. It’s important to remember that when cashing out your policy, you'll be losing the death benefit, so you want to make sure the money you receive is worth it. For loans and withdrawals, you should check with your provider as to how much you can take out at a time, it could depend on what you're using it for.

When Should I Cash Out?

Cashing out your life insurance policy isn't always the best choice, but if you decide it's right for you, you'll want to do it at the right time. Advisors generally suggest that you allow your cash value to grow for at least 10-15 years before cashing out. You may benefit from discussing it with an insurance specialist so they can give you the best advice for your particular situation.

One of the most important benefits of using life insurance while alive is the fact that you can use the cash for other needs. Most people find themselves in a difficult financial situation at some point or another, so being able to have access to money you need from a life insurance policy can be very beneficial.

Now that you know how to use life insurance while alive, you need to ensure you have a policy that allows you to do so.

Our content is created for educational purposes only. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Everdays encourages individuals to seek advice from their own investment or tax advisor or legal counsel.