Using Life Insurance: Your Options And Benefits Now

Life insurance is often thought of as something that only comes into play after the policyholder's death. However, there are ways to benefit from it while you're still alive. Permanent life insurance policies, such as whole life, universal life, variable life, and indexed universal life insurance, have a cash value component that allows you to access and use the money while you're alive. This cash value accumulates over time as you pay your premiums, and you can use it for various purposes, such as paying off debt, making mortgage payments, or financing major expenses. It's important to note that not all policies allow early access, so it's crucial to understand the terms of your specific policy if you want to utilise your life insurance during your lifetime.

Using your life insurance to pay for long-term care expenses

Long-term care can be expensive, but you can use your life insurance policy to help pay for it. Here are some strategies to do so:

Sell a policy for a life settlement

You can sell your life insurance policy to a third party for its market value and use the money to fund your long-term care. This is known as a life settlement. Any type of life insurance can be used, but most companies require a minimum death benefit of $50,000. The shorter your life expectancy, the larger the percentage of the death benefit you will receive. For example, a 90-year-old with a $100,000 death benefit may receive up to $60,000. The money is deposited into an FDIC-insured bank account and professionally managed by a licensed benefit management company, which then makes payments directly to your care providers.

Set up a living benefit program

A living benefit program allows you to receive a lump sum payment, usually up to 50% of your life insurance policy's death benefit, while still reserving some benefits for your family. For example, if you have $200,000 in coverage, you could receive up to $100,000 as a living benefit. This option typically requires a life insurance policy with a death benefit of at least $100,000, and there are no out-of-pocket expenses. However, it is important to note that a living benefit is essentially a loan against the policy, and the entire loan amount, including interest, must be repaid or it will be deducted from the death benefit.

Surrender the policy for cash value

When you surrender a life insurance policy, you give up ownership and the death benefit. If your policy has accumulated cash value, the insurance company will pay you the full amount. In some cases, you may have to pay taxes on this amount. Whether or not you will owe taxes depends on whether the cash value has grown beyond the premiums paid into the policy. Many companies differentiate between "cash value" and "surrender value," so these amounts may differ in the early years of the policy. Additionally, if you plan to use Medicaid to pay for long-term care, the cash portion of your life insurance policy may count against you in terms of eligibility.

Take a loan from cash accumulation

If your life insurance policy has accumulated cash value, you can take out a loan against this amount to pay for long-term care. This option allows you to access most of the cash value, which you then pay back with interest. However, you cannot take out the entire cash value, or the policy will lapse.

Use cash value to fund a new long-term care policy

If you have time to plan, you can use a 1035 exchange to transfer one insurance policy's cash value towards a new policy without incurring tax penalties. This allows you to use the cash value from an existing life insurance policy to fund a new policy with long-term care insurance benefits. For example, you could use the cash value to fund premiums on a hybrid policy, which includes life insurance, long-term care benefits, and living benefits for costs related to illnesses that long-term care insurance may not cover.

Applying for living benefits

Living benefit life insurance allows you to access your death benefit while you are still alive under certain circumstances, usually related to failing health. This type of insurance is also referred to as an accelerated death benefit rider.

To apply for living benefits, you must meet certain qualifying criteria outlined in the policy. This typically includes being diagnosed with a serious illness or condition such as cancer, heart attack, stroke, or terminal illness.

• Research insurance companies that offer living benefits or accelerated death benefits. Both term and permanent life insurance policies may offer these riders, and coverage is available from most major insurance providers. You can also work with a licensed insurance agent or financial professional to find policies that fit your needs and budget.
• Once you find a policy you're interested in, apply for coverage by filling out an application and undergoing a medical exam. The insurance company will use this information to determine your risk profile and the cost of coverage. If you have a pre-existing medical condition, be prepared to provide additional information or documentation to the insurer. Consider no-exam life insurance options if you are already showing symptoms of a disqualifying disease.
• If you are approved for coverage, you can add a living benefits rider to your policy if it's not already included. This will likely increase the cost of the policy, but it provides valuable coverage in case of a serious illness or condition.
• If your policy includes some form of living benefits as standard, you may be able to use the rider to add extensions such as nursing home care. Specific insurance products will vary depending on the company.
• Review the qualifying circumstances under which you can access your accelerated death benefit. This will depend on the rider you choose. Common living benefit options include terminal illness, chronic illness, and critical illness.
• Understand the payout structure. If you are allowed to tap into your death benefits early, you will typically receive a lump sum. You may receive the entire death benefit or only a percentage, depending on the terms of your policy.
• Be aware of the costs involved. Living benefit life insurance adds more cost to your policy because it increases the number of qualifying circumstances for a payout. Other factors that influence the price include your age, health, and medical history.
• Consult with an insurance agent or financial professional. They can guide you through the claims process and help you navigate the next steps after you've been injured or become ill.

Remember, to qualify for a living benefits payout, you must already have the rider in place before you get sick or injured. Most policies have a waiting period before the coverage goes into effect, so plan ahead and choose your coverage carefully.

Borrowing from your policy

Borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. However, there are a few things to consider before doing so. Firstly, it's important to understand that you can only borrow against a permanent life insurance policy, such as a whole life insurance or universal life insurance policy. These policies are more expensive than term life insurance policies but have no predetermined expiration date. They also accumulate a cash value over time, which can be used as collateral for a loan.

When borrowing from your life insurance policy, there is no approval process or credit check required, and you can use the money for anything you want. The loan is also not recognised as income by the IRS, so it remains tax-free as long as the policy stays active. However, it's important to note that the loan will reduce the death benefit if it is not paid off. The interest rates on life insurance loans are generally lower than those for personal loans and credit cards, typically ranging from 5% to 8%.

To borrow from your life insurance policy, you must have sufficient cash value built up, which can take several years. The minimum amount required varies by insurer, but it is typically no more than 90% of the policy's cash value. It's important to consider the pros and cons of borrowing from your life insurance policy before making a decision. While it offers flexible repayment terms and no credit check, it can also reduce the death benefit and put your policy at risk of lapsing if the loan is not repaid.

If you're considering borrowing from your life insurance policy, it's recommended to speak with a financial advisor or estate planning attorney to understand the tax implications and potential impacts on your beneficiaries.

Surrendering your policy

Surrendering your life insurance policy is a way to access the cash value of your policy while you are still alive. However, it is important to note that not all life insurance policies have a cash value—term life insurance, for example, does not.

When you surrender your life insurance policy, you are telling the insurance company that you no longer want coverage. In exchange, you will receive a portion of the cash value of the policy, known as the cash surrender value. This amount will generally be slightly less than the total amount of cash value in the policy due to surrender charges.

There are several reasons why someone might choose to surrender their life insurance policy. One common reason is that the coverage is no longer needed. For example, if the policy's beneficiary passes away, you may have no other person to name as their replacement. Alternatively, if you named your spouse as your beneficiary and are now getting a divorce, you may want to get rid of the policy. Another common reason is that the policyholder's children, who were named as beneficiaries, are now adults who are financially stable and no longer need the coverage.

Another reason to surrender your policy is to get the cash value. Surrendering a policy can be a valuable source of quick cash for someone who doesn't have access to other liquid assets. However, it is important to note that there are alternatives to a cash value surrender, including options that pay more. For example, you could take out a loan using your policy as collateral, or sell your policy through a life settlement.

Before surrendering your policy, it is important to consider the downsides. Firstly, you will be giving up the right to the death benefit protection afforded by the insurance. If you want to replace the lost death benefit later, getting the same coverage might be more complicated or more expensive. Secondly, if you surrender your policy during the early years of ownership, when the value is relatively low, the insurance company will likely charge surrender fees, reducing your cash value. These charges vary depending on how long you've had the policy and the amount being surrendered.

If you have the means, it is recommended that you consider other options before surrendering your life insurance policy, such as borrowing against your 401(k) plan or taking out a home equity loan.

Using cash value to pay premiums

Permanent life insurance policies, such as whole, universal, and variable life insurance, offer a cash value component that can be used to pay your premiums. This cash value is separate from the death benefit and can be accessed while the policyholder is still alive. It is important to note that the cash value returns to the insurer after the policyholder's death, so it is advisable to utilise it during your lifetime.

Using the cash value to pay premiums can be particularly beneficial during retirement when your income may be more limited. By covering the cost of life insurance premiums, you can free up more of your retirement income for daily expenses and enjoy a more comfortable standard of living.

However, it is crucial to monitor the cash value closely. This strategy may only be feasible in the short term, especially if the cash value is small or interest rates are low. Additionally, allowing the cash value to drop too low may result in the loss of your coverage.

Variable and universal life insurance policies are often preferred for this purpose, as they offer greater flexibility in using the cash value to pay premiums. In contrast, whole life insurance policies typically do not allow the use of cash value for premium payments unless it is converted to a paid-up policy, which is not offered by all insurers.

Before utilising the cash value to pay premiums, it is essential to understand the specific rules and requirements of your policy. Consult your insurance agent or an advisor to ensure that you comply with any applicable guidelines and make informed decisions regarding your life insurance coverage.

Frequently asked questions