Life insurance is often regarded as financial protection for surviving family members after a policyholder’s death. But depending on the type of policy you have, you may also benefit from your coverage while you’re alive. You could potentially take a loan from your policy, withdraw the cash value it’s accrued over time, use a living benefit rider or sell your policy.
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Each option has its benefits and drawbacks, but it’s helpful to understand how you could use your life insurance while you’re alive in case the need ever arises. Here’s what to know about your options.
Take a Loan or Withdrawal From Your Policy
It may be possible to take a loan or withdrawal from your policy if you have permanent life insurance with accumulated cash value. Many whole, universal, and variable life insurance policies provide these options.
Taking a loan from your life insurance policy involves borrowing against its cash value. This option is generally only available if you’ve been paying your life insurance premiums for several years, as it takes time for your policy to start accruing cash value. Life insurance loans typically have a lower interest rate than personal or home equity loans, and repaying them may be optional.
A loan can be a smart option if you need cash, but also want to repay your loan to retain your full death benefit. You can choose not to repay it, but there’s a downside: Your death benefit may be reduced by the amount you borrowed plus accumulated interest.
In certain cases, you may also be able to withdraw your policy’s cash value. The amount withdrawn may not be taxable, assuming it’s less than what you’ve contributed to the policy. While a tax-free withdrawal may be useful for covering a large expense or supplementing your retirement savings, it will generally reduce your total death benefit. This can be a drawback, depending on your financial situation.
Use Your Cash Value to Pay Premiums
If your policy allows it, you could also use your accumulated cash value to offset the cost of your premiums. But this is generally only an option with permanent life insurance policies, not term life coverage.
Still, it can be beneficial if you’re on a fixed income. For instance, many retirees opt to tap into the cash value of their coverage to pay for premiums, as doing so allows them to retain their life insurance while also keeping costs low.
Use Your Living Benefit Rider
Some insurers offer a living benefit rider on eligible policies. This type of rider allows you to get a portion of your death benefit early if you’re diagnosed with a terminal illness and have a life expectancy of less than a year. Accessing your death benefit early can help cover the cost of medical expenses associated with your illness, and may provide access to palliative care options that would’ve been unaffordable otherwise.
Living benefit riders often come standard with certain policies, but a fee may apply when you exercise this benefit. Despite this, tapping into a living benefit could be worth it if it results in significant savings on medical costs.
Sell Your Policy
While it might not be worth the trouble or the cost, selling your life insurance policy may be another option if you need cash. If you decide to go this route, you can do so through a reputable broker, but expect to pay broker fees. Depending on the broker, your fees may be up to 30% of the profit from the sale. You’ll also need to pay taxes on the amount you receive. And you won’t get your full benefit amount when you sell your policy, either. The percentage you get may depend in part on the broker you use.
Selling a life insurance policy, commonly called life settlement, is generally considered a last resort for policyholders that can’t afford their coverage any longer. It’s typically not recommended if you can access your policy’s cash value another way or find another source of funding.
The Bottom Line
While life insurance does pay out a death benefit when you pass away, you could also use your policy while you’re alive in certain cases. You may be able to withdraw accumulated cash value, take a loan against your coverage, access a living benefit rider or sell your policy. But selling your policy is generally only recommended if you’ve exhausted all other options, as doing so will cost you in fees and tax payments.
Tips for Buying Life Insurance
- Life insurance can play an important role in your financial plan. A financial advisor can help you understand your needs and potentially connect you with a policy that’s right for you. SmartAsset’s matching tool can help you pair up with financial advisors in your area. In minutes, you have someone on your side who can give you solid financial advice tailored to your situation. So, if you’re ready to begin your investment journey, get started now.
- When shopping for life insurance, you’ll have to decide whether you want a term or permanent life insurance policy. While the former only covers a set number of years, it’s typically more affordable than permanent insurance. If you opt for the latter, you’ll have to choose between whole, universal and variable policies, all with varying costs and features.
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