Key Takeaways
- There are four ways to use your life insurance while you are still alive: borrowing against your policy, claiming accelerated death benefits, cashing out your policy and selling your policy.
- Some choices are only available in specific circumstances or under certain policies. Check your policy details to see which ones you have available.
- There are pros and cons to each choice, including financial penalties. Weigh your options and consider asking a financial advisor for help.
What To Consider When Using Life Insurance While Alive
Life insurance is often used as a means of leaving money to loved ones after the policyholder dies. However, the value of the policy can also be leveraged to access some or all of the money before death.
It’s an important decision that requires careful consideration. Pulling money out will affect your policy’s future payouts, but if you know you’d like to have the option of using your life insurance while you’re alive, it may be a good idea to consider.
- Evaluate your needs.
- Why do you want to access your life insurance now? Do you really require the funds immediately, or can you postpone some of your expenses for a while?
- Research your options.
- Tapping into your life insurance early almost always comes at a cost. Are there other ways you can get the money you need?
- Speak with a financial advisor.
- Advisors have expert knowledge to be sure you’re making a wise decision.
- Choose a reputable insurance company.
- Untrustworthy insurance companies may impose high fees on your policy or even defraud you.
- Understand the costs.
- Accessing life insurance benefits early leaves your family with a lower death benefit when you die. Consider the impact your decision will have on your heirs when making the call.
- Examine the policy thoroughly.
- Certain policies might restrict premature use of your life insurance funds. Ensure that your policy permits early withdrawal before proceeding.
Important Factors To Consider Before Using Life Insurance While You’re Still Alive
The type of life insurance you can use while you are alive is known as permanent life insurance. Generally, this type of life insurance is best for high-income individuals seeking to protect their loved ones while sheltering income from high tax rates.
However, the average-income investor faces too much opportunity cost by putting money into these products. He or she can achieve a stronger economic outcome by buying term life insurance (insurance for a set period, such as 10 or 20 years) and investing the rest. Doing so can provide adequate protection for loved ones, while optimizing long-term return potential.
Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting ProfessionalThomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.
What Are Your Options?
There are several methods for accessing life insurance funds while you are still alive. In the following sections, we will explore some commonly used methods to help you better understand your options. By examining these alternatives, you can make informed decisions about using your life insurance policy for your current needs.
Borrow From the Cash Value of Your Policy
Some policies let you borrow money using the cash value of the policy as collateral for a loan. While these whole life insurance loans usually have lower interest rates than comparable personal loans, there are additional costs associated with accessing the funds. When borrowing against your policy, it’s essential to spend the funds wisely and maintain your future payments.
The Process of Borrowing Cash Value From Your Policy
- Review your policy. Not all policies allow you to borrow against their value.
- Understand the loan terms. Each life insurance loan has unique terms. Before signing the contract, it is important to consider factors such as interest rates, length of the repayment period and other key repayment conditions.
- Consider the impact on your policy. If you pass away before repaying the loan, the insurance company will deduct the amount owed from the death benefit, resulting in less money for your beneficiaries.
- Apply for the loan. Complete the necessary paperwork and submit it to your insurance company. They will inform you if any additional documentation is required.
- Have a purpose for the loan. Your insurance company may ask about the intended use of the funds. Depending on your response, the loan may be accepted or denied.
- Repay the loan. If your loan is approved, you will make regular payments toward the loan principal.
Consider Accelerated Death Benefits
Another option to consider is accelerated death benefits. With this option, no repayment is required. Instead, some of the death benefit that your family would receive after your passing is advanced to you while you are still alive.
Accelerated death benefits are available only to individuals in specific circumstances. If you’re terminally ill or need extensive medical care, you may qualify.
Using Accelerated Death Benefits
- Review your policy. Check your policy to determine if accelerated death benefits are included and, if so, review the conditions carefully to see if you meet the qualifications.
- Understand the conditions for using accelerated death benefits. Most policies that offer these benefits require you to be terminally ill, severely disabled or permanently confined to a nursing home before you can access them.
- Determine the amount available. Accelerated death benefits grant you a portion of your total death benefit. Your policy terms detail how much you can receive.
- Apply for benefits. Submit an application to your insurance company letting them know you would like to claim accelerated death benefits. You may need to provide medical documentation to support your claim.
- Understand the impact on your policy. Any benefits received before your death will be deducted from the death benefits that your family will receive in the future.
- Use the benefits wisely. Accelerated death benefits are intended for use in challenging circumstances. Use the money to pay for the care you need or to enrich the last days of your life.
Cash Out Your Life Insurance Policy
Some life insurance companies let you surrender your policy for its cash value — the amount of money you have paid toward the policy so far. By doing this, you will no longer be required to pay any more premiums toward your policy. However, it’s important to note that if you access your life insurance funds while you’re still alive, your beneficiaries may not receive the same amount of benefits when you pass away.
Cashing Out Your Life Insurance Policy
- Understand the consequences. If you cash out your policy, your beneficiaries won’t receive death benefits after you die.
- Review your policy. Some policies require you to hold them for a certain number of years before you can cash out. Additionally, you may be subject to fees on the money you receive from accessing your life insurance funds.
- Consider alternatives. Cashing out your life insurance policy is a big decision. Consider whether there might be another way to get the money you need, such as selling some other investments or personal property.
- Consult with a financial advisor. Your advisor will assess your situation and offer guidance on the best course of action to take.
- Contact your insurance company. To cash out your policy, inform your insurer of your intention. The insurer will then process your request, and the cash out should be completed within a few weeks.
- Receive the payment. You’ll receive your funds by electronic transfer or by check.
- Consider the tax implications. You may owe taxes on the cash value from your policy. Ask your accountant or financial advisor for more information and guidance.
What Are the Pros and Cons of Each Option?
Every method of accessing your life insurance before you pass away has its pros and cons. Consider your priorities and the factors that are most significant to you.
Borrowing Cash Value From Your Policy
Pros
- Keep ownership of the policy
Cons
- Must repay loans with interest
- Any remaining balance will be subtracted from your death benefit amount
Accelerated Death Benefits
Pros
- There is no need to repay benefits
- Keep some money available for your loved ones after you die
Cons
- Can only be accessed in certain circumstances
Cashing Out Your Life Insurance Policy
Pros
- Get your money with no questions asked
Cons
- Lose some of the value of your policy
- May owe taxes on the proceeds
Should You Sell Your Life Insurance Policy?
If none of the above options are suitable for you, another strategy is to sell your life insurance policy to an investor. This investor will give you a lump sum for the right to collect the death benefit after you die.
However, this is not a common approach. Give the matter some serious thought before you make your decision, considering every factor listed below.
- What are your financial needs?
- If you need money right away, selling your policy can be a convenient way to get quick cash.
- What is the value of your policy?
- The more your policy is worth, the more you stand to gain from selling it.
- What are your premiums?
- If you can’t pay your premiums, selling your policy is a smart move.
- How is your health?
- If your health is declining, selling your policy can help you make the most of the time you have left.
- Who are your beneficiaries?
- It’s important to consider how selling your policy will affect your family’s future financial security. If you sell, your family won’t receive death benefits. Consider this trade-off.
- What are your alternatives?
- Consider exploring other options for generating cash flow, as there may be more suitable methods to achieve your financial goals.
