Life Insurance: Death's Companion Or Just A Myth?

Life insurance is a financial safety net that provides financial protection to your loved ones after your death. It is a contract between the policyholder and the insurance company, where the latter agrees to pay a death benefit to the beneficiaries upon the death of the insured. While the primary benefit of life insurance is that it allows you to leave money to your beneficiaries when you die, there are certain circumstances where you can claim cash from your policy while you're still alive. This includes situations where your policy has a cash value component, you have a terminal illness, or you have certain qualifying medical conditions.

Life insurance policies typically have a waiting period, which is the time between when you apply for a policy and when it becomes active. During this time, the insurance company evaluates your background and health history. If you pass away during the waiting period, your beneficiaries will not receive a payout as the policy is not yet active.

It's important to note that life insurance policies don't pay out in every situation. For example, if you lie on your application, engage in risky behaviours, or fail to pay your premiums, the insurance company may deny the payout. Additionally, most policies have a suicide clause that spans the first two years of the policy, during which suicide is not covered.

There are different types of life insurance policies, such as term, whole, universal, and variable, each with its own features and benefits. When choosing a policy, it's crucial to consider your financial situation, long-term goals, and whether you want early access to your policy's benefits.

Cashing out life insurance before death

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. There are several kinds of life insurance, including term and permanent plans.

Term life insurance provides coverage for a set amount of time, such as 15, 20, or 30 years. It does not contain a cash value, and you cannot borrow money against your death benefit.

Permanent life insurance, on the other hand, never expires as long as the policyholder continues to pay premiums. It also has a cash value account that can be borrowed against. There are two main types of permanent life insurance: whole life and universal life.

If you have a permanent life insurance policy, you may be able to cash out your policy before you die. Here are some options for doing so:

• Withdraw from your policy: Depending on how much you have paid in premiums, you can make a partial withdrawal from the cash value of your policy. This is a fast and easy way to access cash from your policy, and the money you take out is tax-free up to the amount of premiums you have paid. However, withdrawals may reduce your death benefit and could be subject to taxes if they exceed the amount of premiums paid.
• Borrow from your policy: You may be able to take out a loan against the cash value of your policy. You will have to pay interest on the loan, but you won't need to go through a credit check or collateral process. The loan amount will be deducted from your death benefit if it is not repaid.
• Surrender your policy: You can cancel your policy and receive the cash value that has accumulated, minus any fees or taxes. However, this will result in the loss of your insurance coverage and the death benefit for your beneficiaries.
• Use living benefits: If you have a terminal, chronic, or critical illness, your policy may allow you to access a portion of your death benefit early. This can help cover medical or living expenses.
• Apply cash value to policy premiums: If you are having trouble making premium payments, you can use the accrued cash value to pay the premiums and keep your policy in effect.

It is important to carefully consider the pros and cons of cashing out your life insurance policy before making a decision. Cashing out can provide financial support, but it may also result in a lower payout for your beneficiaries in the future. Additionally, there may be tax implications and hidden fees associated with withdrawing or surrendering your policy.

Whole life insurance

Coverage and Protection

Premiums

Cash Value

One of the distinguishing features of whole life insurance is its cash value component. This allows the policy to function as an investment vehicle. A portion of your premiums is put into an investment account that grows over time, tax-deferred, at a fixed or established rate. The cash value can be accessed by the policyholder during their lifetime, providing funds for various needs such as a down payment on a home or supplemental retirement income. Withdrawals and loans against the cash value will reduce the death benefit.

Riders and Customization

Peace of Mind

Long-Term Planning

Surrendering a life insurance policy

There are two main types of life insurance policies: term and permanent. Term life insurance provides coverage for a set amount of time, such as 15, 20, or 30 years, and is generally cheaper than permanent life insurance. Permanent life insurance, on the other hand, covers the insured for their entire life as long as premiums are paid and also includes a cash-value account. This account grows with each premium payment and with interest, and the policyholder can leverage this account if needed.

While term life insurance policies don't build cash value, they can sometimes be surrendered. However, they won't have any cash surrender value, so surrendering them essentially means removing the monthly premium from the budget. Permanent life insurance policies, on the other hand, can be surrendered for their cash value.

There are a few things to consider before surrendering a life insurance policy. First, if the policy is relatively new, surrender fees may be incurred, reducing the amount of cash received. Second, the gain on the policy will be taxed as income. It's important to consult a tax professional before making any decisions. Additionally, surrendering a policy means losing the coverage it provided, which could be a significant loss depending on the situation.

There are a few alternatives to surrendering a life insurance policy. One option is to take out a loan from the insurance company, using the policy as collateral. Another option is to sell the policy to a third party through a life settlement. This can result in a higher payout than surrendering the policy, but it also means giving up control of the death benefit.

Borrowing from a life insurance policy

Permanent life insurance policies build cash value over time, which can be borrowed against. This cash value is separate from the death benefit and is meant to offset the rising cost of insurance as you age, allowing premiums to remain level. The cash value grows at a rate dependent on the type of policy. For example, in a regular universal life policy, it grows based on current interest rates, while in a variable universal life policy, the cash value is invested by the owner in the stock market.

Borrowing against your life insurance policy does not affect your credit score and does not require an approval process or credit check. The interest rates on these loans are typically much lower than on a bank loan or credit card, ranging from 5% to 8%. Additionally, there is no mandatory monthly payment, and the loan is not recognised by the IRS as income, so it remains tax-free as long as the policy stays active.

However, there are some risks associated with borrowing against your life insurance policy. If you pass away before repaying the loan, the amount you owe, including interest, will be deducted from the death benefit, resulting in a lower payout for your beneficiaries. Furthermore, if the loan and interest exceed the policy's cash value, your policy could lapse, and you may owe taxes on the amount borrowed. Therefore, it is important to make regular interest and premium payments to avoid these issues.

Before deciding to borrow from your life insurance policy, it is recommended that you discuss your needs and goals with a financial advisor or estate planning attorney to fully understand the tax implications and potential impacts on your loved ones.

Life insurance and suicide

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person dies. There are several types of life insurance, including term and permanent plans. Term life insurance provides coverage for a set number of years, while permanent life insurance covers the insured person for life as long as premiums are paid.

In general, life insurance policies cover suicide, but there is an important caveat to this. Most policies include what is known as a "suicide clause" that prevents the insurer from paying out the claim if the insured person's death was due to self-inflicted injury within a certain period from the start of the policy. This period is typically two years but can range from one to three years depending on the insurer. The clause is meant to prevent someone from purchasing a policy immediately before taking their own life so that their loved ones can receive financial benefits.

If the suicide exclusion period has ended, life insurance can cover suicide and pay out the death benefit as long as no other terms in the policy have been violated. It's important to note that switching life insurance policies restarts the suicide clause and contestability period, even if the new policy is from the same company.

Group life insurance through an employer or organization, as well as military life insurance, generally does not include a suicide clause, so the policy can pay out for suicidal death. However, supplemental life insurance purchased through an employer usually has a standard suicide clause and contestability period.

Life insurance policies also have a contestability period, typically two years, during which the insurer can deny a claim if they find undisclosed health conditions or discrepancies in the policy application. This period is separate from the suicide clause.

While life insurance is intended to provide financial protection for loved ones after the policyholder's death, there are some circumstances in which the policy can be accessed while the policyholder is still alive. For example, some policies have a cash value component or living benefits that allow the policyholder to withdraw money, take out a loan, surrender the policy, or sell the policy. However, accessing these funds will reduce the total amount left for beneficiaries after the policyholder's death.

Frequently asked questions