Life Insurance: Utilizing Benefits While Living

Life insurance is often thought of as something that will benefit your loved ones after you die. However, there are ways to use your life insurance policy while you're still alive. This can include funding education, supplementing retirement income, paying down debt, making mortgage payments, or financing other major expenses. Not all policies allow for early access, so it's important to do your research when choosing a plan. Permanent life insurance policies, such as whole, universal, and variable life, allow you to access the cash portion of your account. On the other hand, term life insurance does not have a cash element for policyholders to access. Permanent life insurance policies are typically more expensive and may require medical examinations, but they offer the flexibility of living benefits and the potential for cash value growth over time.

Tap into the cash value of your life insurance policy

Permanent life insurance policies, such as whole life and universal life insurance, offer a cash value component that can be tapped into while the policyholder is still alive. This feature is not available with term life insurance policies.

Loans

You can borrow against the cash value of your permanent life insurance policy. The money does not come directly from your policy but is lent by the insurer who uses your policy as collateral. This type of loan does not require a loan application or credit check, and the interest rates are typically lower than those for personal loans or home equity loans. There is also no set repayment schedule, but interest will accumulate and reduce the death benefit. If you choose not to repay the loan, the outstanding balance will be deducted from the death benefit paid out to your beneficiaries.

Withdrawals

You can make a partial or full withdrawal from the cash value of your permanent life insurance policy. Withdrawing money does not incur interest charges, but it may affect policy premiums and reduce the death benefit. Withdrawing more than you've paid into the policy may also result in income tax on the earnings.

Surrender the Policy

You can cancel your permanent life insurance policy and receive a surrender cash value payment. This option provides access to a large portion of the cash value, but it means you will no longer have life insurance coverage, and your beneficiaries will not receive a death benefit. Surrender fees and taxes can also reduce the amount received.

Use Cash Value to Pay Premiums

You can use the cash value of your permanent life insurance policy to pay part or all of your premiums, making it easier to maintain coverage. This is a popular option for older policyholders who want to use their retirement income for living expenses while still retaining life insurance coverage.

Apply for living benefits

Life insurance is often thought of as a financial safety net for loved ones after your passing. However, certain life insurance policies offer "living benefits", which provide financial assistance and protection while you are still alive.

Living benefits are typically associated with permanent life insurance policies, which are more expensive than term life insurance policies. Permanent life insurance policies include whole life insurance and universal life insurance. These policies offer lifelong coverage and allow you to build "cash value" over time, which can be accessed while you are still alive.

Understand the Types of Living Benefits: Living benefits can be accessed through policy riders or the cash value of your permanent life insurance policy. Policy riders are add-ons to your policy that provide additional protection. Common types of living benefit riders include:

• Terminal Illness Rider: This rider provides funds if you receive a terminal diagnosis, often defined as a life expectancy of two years or less. It can help cover end-of-life care and other expenses.
• Critical Illness Rider: This rider provides funds to cover medical expenses for certain qualifying illnesses with high costs and a shortened life expectancy, such as a stroke, heart attack, or kidney failure.
• Chronic Illness Rider: Similar to the critical illness rider, this applies if you are diagnosed with a chronic illness that prevents you from performing at least two out of six "activities of daily living" (ADLs), such as eating, bathing, or dressing.
• Return of Premium Rider: This rider refunds the premiums paid into your policy if you outlive the policy term. It is one of the most expensive riders available.
• Waiver of Premium Rider: This rider allows you to stop paying premiums while keeping the policy in force if you suffer a disability that affects your ability to earn an income.

• Review Your Policy and Insurance Provider's Offerings: Before applying for living benefits, carefully review your existing life insurance policy. Determine if your policy includes any living benefit riders or if your insurance provider offers them. Some insurers automatically include certain living benefit riders, such as an accelerated death benefit rider or a waiver of premium rider, at no extra cost.
• Understand the Costs and Impact on Death Benefits: Living benefit riders typically come at an additional cost, and some can significantly increase your life insurance premiums. Additionally, keep in mind that accessing living benefits may reduce the death benefit that your survivors will receive. This reduction may be more significant than the amount you withdraw or borrow.
• Assess Your Financial Needs and Goals: Consider your financial situation and goals when deciding to apply for living benefits. Evaluate the level of financial security you are seeking and whether you want the flexibility to use a portion of your death benefit in case of unexpected illnesses or expenses.
• Consult a Financial Professional: Discuss your options with a financial professional or insurance agent/broker. They can help you understand the specific living benefits available, the associated costs, and how they align with your financial needs and goals.
• Complete the Necessary Paperwork: When applying for living benefits, be prepared to submit the required paperwork and medical records to your insurance provider. They will assess your eligibility for releasing the funds.
• Understand Accessing Cash Value: If you have a permanent life insurance policy with built-in cash value, you can typically access it through loans, withdrawals, or surrendering the policy. Loans allow you to borrow against the cash value, but they will accrue interest. Withdrawals let you take money out without interest charges, but they may raise your premium or lower your death benefit. Surrendering the policy means cancelling it and receiving the accrued cash value, less any surrender charges and expenses.

Remember, the availability and specifics of living benefits can vary depending on your insurance provider and the type of policy you have. It is important to carefully review your policy and consult with a financial professional before making any decisions.

Sell your life insurance policy

Selling your life insurance policy can be a strategic way to unlock financial value, but it's important to understand the process and your options. There are two primary paths: a life settlement and a viatical settlement. Both allow you to sell your policy, but they are designed for different situations and offer varying payout amounts depending on your policy type and health condition.

Life settlement

A life settlement is when you sell your life insurance policy to a third party for a cash payout. This payout is typically more than the policy's cash surrender value but less than its full death benefit. The buyer takes over the policy, including future premium payments, and expects a return on their investment. As a result, they will offer a price that is profitable for them but higher than what you would receive by simply surrendering the policy.

Viatical settlement

A viatical settlement is specifically for those with a terminal illness and a life expectancy of less than 24 months. It generally offers a higher payout since buyers expect to collect the death benefit sooner. Payment amounts are regulated by state laws, ensuring that terminally ill individuals receive a fair percentage of the policy's value.

Factors affecting the value of your life insurance policy

The value of your life insurance policy depends on several factors, including:

• The death benefit: The larger the death benefit, the larger the payout, as this is ultimately what the buyer is investing in.
• Premium costs: Lower premiums result in a higher life settlement value since they are less expensive and less risky for the buyer.
• Life expectancy: A shorter life expectancy makes the policy more valuable because the buyer expects to pay less in premiums over time.
• Health status: The presence of health conditions reduces life expectancy and generally increases the value of a life settlement.
• Age: Older individuals generally receive more money from selling their policy because of their shorter life expectancy.

Steps to sell your life insurance policy

• Consider hiring an independent advisor: An advisor with expertise in life settlements can provide an accurate appraisal of your policy's value and guide you through the process.
• Find a reputable, licensed broker: A life settlement broker may charge a fee, but they can help you get the best offer by finding the highest bidder. They have a fiduciary duty to work in your best interests.
• Get multiple offers: Reach out to multiple life settlement providers and compare their offers to ensure you get a fair deal.
• Round up your paperwork: 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.

Tax considerations when selling your life insurance policy

The tax implications of selling your life insurance policy depend on the type of settlement:

• Viatical settlement: If you are terminally ill, the money you receive is usually tax-free.
• Life settlement: Any amount above what you have paid in premiums is taxed as ordinary income, and amounts above the cash value of the policy are considered capital gains.

Pros and cons of selling your life insurance policy

Pros:

• Immediate cash flow: Selling your policy can provide a lump-sum payment to cover immediate financial needs.
• Relief from premium payments: Selling your policy can free you from the burden of ongoing premium payments.
• More value than surrendering: A settlement usually offers a higher payout compared to surrendering your policy.

Cons:

• Loss of death benefit: Once you sell your policy, your beneficiaries will no longer receive a death benefit.
• Possible tax implications: Proceeds from a life settlement could be taxed as ordinary income, reducing the overall value you receive.
• Medicaid eligibility impact: Selling your policy could affect your eligibility for needs-based programs like Medicaid.
• Health check-ins: The buyer of your policy may have the right to inquire about your health and life expectancy on a regular basis.
• Potential for multiple sales: The settlement provider that buys your policy may resell it, leading to the disclosure of your medical information to multiple third parties.

Alternatives to selling your life insurance policy

If you are in need of funds or struggling to keep up with premium payments, consider these alternatives before selling your policy:

• Accelerate the death benefit: If you are dealing with a terminal or chronic illness, you may be able to access part of your death benefit while still alive through an accelerated death benefit rider.
• Take out a loan against your policy: With permanent life insurance, you can borrow against the cash value that has accumulated.
• Withdraw funds from the cash value: With permanent policies, you can typically withdraw funds directly from the cash value without having to repay them, although this will reduce the death benefit.
• Replace your policy: Find a cheaper policy that better suits your current needs.
• Surrender your policy: Surrender your permanent life insurance policy to receive the surrender value, which is the cash value minus any fees or outstanding balances.
• Opt for a Medicaid life settlement: If you need long-term care or are on Medicaid, you may be able to sell your policy while retaining Medicaid eligibility in some states.

Common questions about selling your life insurance policy

The amount you can receive depends on factors such as your age, health, the type and value of your policy, and the insurer's financial stability. Permanent policies typically offer higher payouts because they accumulate cash value over time.

The timeline can range from a few weeks to several months, depending on the type of settlement and the approach you take. Working with a broker to gather multiple offers may take longer, while accepting an early offer from a life settlement provider could result in a shorter timeline.

You can ask an independent financial advisor for recommendations or conduct online research. Ensure that the broker is licensed in your state and a member of organizations like the Life Insurance Settlement Association (LISA).

Most types of life insurance that an individual purchases directly can be sold, including term, whole, and universal policies. However, group life policies and policies provided by your employer or issued by the government typically cannot be sold.

Selling your life insurance policy can provide financial flexibility and immediate cash flow, but it is important to carefully consider the long-term impact, especially if your loved ones rely on the death benefit. Weigh the pros and cons and explore alternative options before making a decision.

Borrow against the cash value

Borrowing against the cash value of a life insurance policy is a quick and easy way to get cash in hand when you need it. However, it is only possible to borrow against a permanent life insurance policy, such as a whole life or universal life insurance policy, that has a cash value component. Term life insurance, which is cheaper and more suitable for many people, does not have a cash value and is designed to last for a limited period, generally anywhere from one to 30 years. In some cases, a term life policy can be converted into a permanent policy, in which cash value can build over time.

When you borrow against the cash value of a life insurance policy, your insurer lends you the money and uses the cash in your policy as collateral. This means that the policy's cash value can continue to accumulate, but it's important to check with your insurance company how interest and any dividends will be determined and paid when you have an active loan. There is no approval process or credit check for a policy loan, and the money can be used for anything from bills to vacation expenses to a financial emergency. The loan is also not recognised by the IRS as income and remains free from tax as long as the policy stays active.

However, borrowing against a life insurance policy is not risk-free. If left unpaid, interest is added to the loan balance and accrues, putting the policy at risk of lapsing. If the loan amount exceeds the policy's cash value, it is likely that you will owe taxes on the amount borrowed. Additionally, if you pass away with an outstanding loan on your policy, the loan amount and any interest owed will be deducted from the death benefit, reducing the amount received by your beneficiaries.

The maximum amount that can be borrowed against a life insurance policy is typically up to 90% of its cash value, and it usually takes a few years for the cash value to build up to a sufficient level to take out a loan. Interest rates for life insurance loans are generally lower than those for personal loans and credit cards, typically ranging from 5% to 8%.

Withdraw a portion of the cash value

Permanent life insurance policies, such as whole life and universal life, allow you to withdraw a portion of the cash value while you're alive. This is in contrast to term life insurance, which does not have a cash element for policyholders to access.

Withdrawing a portion of the cash value of your permanent life insurance policy can be done without paying income taxes, as long as the withdrawal is not more than the amount you've paid into the policy. However, there are some potential disadvantages to this approach. Firstly, your death benefit will likely be reduced, and this reduction may be greater than the amount withdrawn, depending on the specific terms of your policy. Secondly, if you withdraw more than you've paid in premiums, you will owe income tax on any earnings. Therefore, it is important to carefully review the terms of your policy before making a withdrawal.

It is also worth noting that it usually takes a few years for the cash value in a policy to grow to a usable sum. Additionally, permanent life insurance policies are typically more expensive than term life insurance policies.

Frequently asked questions