Can you use life insurance while alive?
Life insurance is typically purchased to provide financial protection for loved ones in the event of the policyholder’s death. However, life insurance can also provide a policyholder with so-called “living benefits”, or financial advantages that you can use while you’re still alive.
So what are these “living benefits” of life insurance?
If you are considering life insurance, or you have already purchased a policy, chances are you only focus on two things: the death benefit and the premium. This means you are missing out on several policy features that can address immediate needs as well as help you plan for your financial future.
Regardless of whether you have a permanent policy, such as whole life insurance or universal life insurance, or a term policy, you have access to several important living benefits. That’s right – term life insurance can have living benefits, too! Here is a list of living benefits, and what type of policy (permanent, term, or both) for which the benefits are available:
1. Terminal Illness
Many life insurance policies include an accelerated death benefit or chronic illness rider which allows you to tap into a portion (typically 50% or more) of the death benefit if you are diagnosed with a terminal or chronic illness. The money can be used in any way you like, such as travel, purchasing property and other goods, or medical expenses.
Available for: Both Term and Permanent Policies
2. Long-term care
3. Low-interest loan
The cash value in your permanent life insurance policy is available to be taken out for policy loans. Life insurance loans typically have a lower interest rate than personal or home equity loans, and repaying them may be optional, depending on the carrier.
Available for: Permanent Policies
4. Money for expenses
The cash value in your permanent life insurance policy can also be withdrawn to use for expenditures that arise. Policy withdrawals will affect the death benefit, your surrender value, and could impact your income taxes, so it’s important to consult with a tax professional before making withdrawals.
Available for: Permanent Policies
You can use both loans and withdrawals for the following expenses:
- Down payment on a new home
- Funding your child’s education
- Investment capital for business opportunities
- Cash for emergencies
- Life insurance premiums
- Medical bills
- Supplementing your retirement income
- Estate taxes
- And many more!
5. Sell it!
If you decide to go this route, you can only do so through a broker licensed to perform such a transaction, and expect to pay high fees and usually taxes on the amount you receive.
Although the proceeds of a life settlement typically provide a lump sum payout that is higher than the policy’s surrender value, and come with the freedom to use the funds however you wish, it is generally considered a last resort for policyholders, due to the fees and potential tax consequences.
Available for: Permanent Policies
Conclusion
Life insurance is an incredibly flexible product if used to its full potential. Of course, life policies are designed to pay out a death benefit when you pass away, however you can also use your policy while you’re alive in several cases. By understanding and leveraging these “living benefits”, you can address immediate needs and gain greater control over your financial future. With any financial decision such as this, it’s best to seek wise counsel from qualified professionals before making a final decision.
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