Life Insurance: Benefits To Reap While Alive

Life insurance is often thought of as a safety net for loved ones after the policyholder has passed away. However, there are ways to benefit from it while you are still alive. The type of life insurance you have will determine what you can do with it during your lifetime. Term life insurance, for example, does not offer a cash payout while you are alive, but permanent life insurance policies do. This includes whole life insurance, universal life insurance, variable life insurance, and indexed universal life insurance. With these policies, you can access the cash value of your policy in several ways, including taking out a loan, withdrawing cash, surrendering your policy, or selling it. You can also use the cash value to pay your premiums or take advantage of living benefits if you are diagnosed with a terminal illness.

Borrow against your policy

Borrowing against your life insurance policy can be a quick and easy way to get cash in hand when you need it. However, it is important to note that this option is only available if your policy has a cash value component, which is typically found in permanent life insurance policies such as whole life and universal life insurance policies. Term life insurance policies, on the other hand, do not have a cash value and therefore cannot be borrowed against.

When you borrow against your life insurance policy, you are essentially borrowing from yourself, as the death benefit and cash value of the policy are used to guarantee the loan. There is no formal approval process or credit check required, and the funds can be used for anything from bills to vacation expenses to financial emergencies. Additionally, life insurance loans do not affect your credit and are generally not recognised by the IRS as income, so you won't have to pay taxes on them. However, it's important to note that if the loan is not paid back before the policyholder passes away, the beneficiary will only receive the remaining portion of the death benefit after the loan amount and any interest owed are deducted.

To borrow against your life insurance policy, review your policy to understand the loan terms and conditions, including interest rates, the length of the repayment period, and other key repayment conditions. Then, submit a loan application to your insurance company, who will inform you if any additional documentation is required. It's important to note that the amount you can borrow is typically limited to a maximum of 90% of the policy's cash value, and it may take several years for the policy to build up enough cash value to borrow against.

While borrowing against your life insurance policy can be a convenient option, it's important to carefully consider the potential risks and impacts on your policy and beneficiaries before proceeding.

Surrender your policy

Surrendering your life insurance policy means cancelling it and receiving its surrender value, which is the cash value minus any surrender fees. If you go down this route, your coverage ends and your beneficiaries will not receive a death benefit when you die.

You'll owe taxes on the amount you receive that's above the cost basis. Surrender fees are usually high in the early years of the policy and then gradually phase out over time. Most policies have a waiting period of at least 15 years before you have the option to surrender it.

If you surrender your policy, you'll only get one offer from the insurance company, and their goal is to give you as little money as possible. However, if you need a large amount of cash quickly, surrendering a cash value life insurance policy may be a good option, especially if your actual need for life insurance has diminished.

• No longer needing coverage, e.g. children have grown up and become financially independent
• Unaffordable costs: insurance premiums are expensive and can become unaffordable, so surrendering means you will no longer need to keep paying premiums
• Finding a better policy: the policy you purchased in the past is no longer a good fit for your current needs, so you can surrender it and get a new policy that offers better coverage or cheaper premiums
• Cash needs: if you urgently need cash, surrendering your policy will award you a lump sum

Before you decide to surrender your policy, it's important to examine all the angles of how this decision can impact your financial future. For example, you may lose out on a significant amount of return on your investment in the policy.

Pay premiums with cash value

Paying life insurance premiums with cash value is a feature of permanent life insurance policies, such as whole life and universal life insurance. This option is not available with term life insurance policies, which do not have a cash element.

With permanent life insurance, a portion of your premiums is directed into an investment account, known as the cash value. This money grows with interest over time, and you can use it to pay your premiums. However, it's important to note that this strategy may only work for a short period, especially if you start when the cash value is small or if interest rates are low. You will need to carefully monitor the cash value to ensure it doesn't drop too far, or you may lose your coverage.

For example, if your annual premium is $5,000 and you have $100,000 in cash value, you would need the policy's cash value to net 2.5% interest annually to halve your premium payments while maintaining the full cash value.

Whole life insurance policies typically don't allow you to pay premiums using the policy's cash value unless you convert to a paid-up policy. Not all insurers offer this option, but with a paid-up life insurance policy, the cash value is large enough that you can stop paying premiums out of pocket. However, the downside is that each premium payment is deducted from the policy's death benefit, and less cash value is available for other purposes, such as a policy loan.

Variable and universal life insurance policies are often favoured because they allow you to use the policy's cash value to pay premiums more freely. If you have a fairly large cash value with consistent returns, you can keep your coverage in place for years at little to no additional cost.

Use living benefits

Life insurance is often thought of as a way to provide for your loved ones after your death. However, there are several ways to use your life insurance policy while you are still alive, known as "living benefits". Here are some options to consider:

Permanent Life Insurance Policies

The type of life insurance that allows you to access benefits while alive is called permanent life insurance. This includes whole life insurance, universal life insurance, variable life insurance, and indexed universal life insurance. These policies are typically more expensive than term life insurance and may require medical examinations. However, they offer the advantage of accumulating cash value over time, which can be accessed during your lifetime.

Convertible Term Life Insurance

If you already have a term life insurance policy, you may have the option to convert it into a permanent life insurance policy, thus gaining access to living benefits. Check with your insurer to see if this is possible and what the specific requirements and implications are.

Loans

Many life insurance companies allow you to take out a loan using the cash value of your policy as collateral. This option usually does not require a credit check and offers flexible repayment schedules. However, interest charges will accrue, which can negatively impact your death benefits. It is important to carefully consider the potential consequences before choosing this option.

Withdrawals

You may be able to withdraw money from the cash value of your policy without worrying about interest charges. This is typically the fastest and easiest way to access cash from your life insurance policy. Withdrawals are generally tax-free up to the amount of premiums you have paid. However, any earnings that exceed this amount may be subject to taxation. Additionally, withdrawals could potentially raise your premium or lower your death benefit.

Surrendering the Policy

Surrendering your policy means cancelling your coverage and receiving the full cash value that has accumulated. This option will also cancel the death benefit, so your beneficiaries will not receive anything when you pass away. Surrendering a policy may incur fees and income tax on earnings if your payout exceeds the premiums you have paid.

Paying Premiums with Cash Value

You can use the cash value of your permanent life insurance policy to pay your premiums. This can be especially useful later in life when you are on a limited income, as the policy essentially pays for itself.

Living Benefit Riders

Living benefit riders are add-ons to your life insurance policy that provide benefits while you are alive. These include terminal illness riders, critical illness riders, and long-term care riders. Terminal illness riders allow you to receive a portion of your death benefit early if you are expected to pass away within a certain period. Critical illness riders provide benefits to pay for treatment services for specified illnesses. Long-term care riders help cover the cost of in-home care or nursing home expenses.

Selling the Policy

If you no longer want or need your life insurance coverage, you can sell your policy to a third party through a life settlement. The buyer will pay you a lump sum that is more than the cash surrender value but less than the death benefit. They will then take over premium payments and collect the death benefit upon your death.

It is important to carefully consider your options and weigh the pros and cons of each choice before deciding to access your life insurance benefits while alive. These choices may have financial implications and could affect the benefits available to your beneficiaries after your death. Consulting with a financial advisor can help you make an informed decision.

Sell your policy

Selling your life insurance policy is a way to unlock value from an asset you no longer need. It is a big decision and should be carefully considered. Here are some things to keep in mind if you are thinking about selling your life insurance policy:

• Financial needs: If you need money right away, selling your policy can be a convenient way to get quick cash. The more your policy is worth, the more you will gain from selling it.
• Premiums: If you can't afford the premiums, selling your policy can relieve you of that financial burden.
• Health: If your health is declining, selling your policy can help you make the most of the time you have left.
• Beneficiaries: Consider how selling your policy will affect your family's future financial security. If you sell, your family won't receive a death benefit.
• Alternatives: Explore other options for generating cash flow, as there may be more suitable methods to achieve your financial goals.
• Tax implications: Selling your life insurance policy may come with tax consequences. The money you receive from a life settlement may be taxed as ordinary income, and amounts above the cash value of the policy may be considered capital gains.
• Public assistance: Selling your policy could affect your eligibility for public assistance programs such as Medicaid. The lump-sum payout might push you over the income or asset limits.
• Broker vs provider: You can sell your policy through a life settlement broker or directly to a life settlement provider. A broker will help you find the best offer by gathering multiple bids, but they will charge a commission. Going directly to a provider may be faster but could result in a lower offer.
• Medical records: Potential buyers will require access to your medical records to assess your policy's value. Be prepared to sign a release allowing them to obtain these records.
• Waiting periods: Some states require you to own the policy for a set number of years, usually between two and five, before you can legally sell it. Make sure to check the regulations in your state.

Frequently asked questions