Most people think of life insurance as a way to provide a death benefit to their beneficiaries after they pass away. But did you know you can also use life insurance while alive?
Many life insurance policies, especially permanent life insurance policies like whole life insurance and indexed universal life insurance, come with living benefits that can provide significant financial flexibility and security during your lifetime. Let’s explore how you can make the most of your life insurance policy while you’re still alive.
Access the Cash Value of Your Life Insurance Policy
One of the main ways to use life insurance while alive is by accessing the cash value that accumulates within permanent life insurance policies such as whole life insurance and universal life insurance:
- Build Cash Value: Over time, a portion of your life insurance premiums goes towards building the cash value of your policy. This cash value component grows on a tax-deferred basis and can be accessed in several ways. One thing to note is both whole life and IULs can build cash value, but you can only max fund IULs, not whole life.
- Policy Loan: As a policyholder, you can take out a policy loan against your policy’s cash value. This can provide a source of funds without having to go through a credit check or pay interest rates typically associated with a credit card or personal loan. However, it’s important to remember that any loan not repaid will reduce the policy’s death benefit available to your beneficiaries.
- Withdrawals: You can also withdraw funds directly from the accumulated cash value. Withdrawals up to the amount of premiums paid are typically tax-free, but any amount above that may be subject to income tax and will reduce the death benefit.
- Surrender Value: If you no longer need the policy, you can surrender it entirely and receive the surrender value—the amount available in your policy minus any fees. This is a way to access a lump sum if you need a substantial amount of cash.
Benefit from Living Benefit Riders
Living benefits are a key feature that allows you to use part of your life insurance policy while you’re alive, especially in times of critical need:
- Accelerated Death Benefit: If you are diagnosed with a terminal illness or a chronic illness, an accelerated death benefit rider allows you to access a portion of your policy’s death benefit early. This can help cover medical expenses or other urgent financial needs, providing you with financial security when it’s needed most.
- Critical Illness and Chronic Illness Riders: These riders enable you to access your life insurance benefits if you suffer from a critical illness like cancer or a chronic illness that requires long-term care. The amount you can access varies by life insurance company and type of policy, but it provides a way to tap into the benefit amount without having to surrender your policy.
- Long-Term Care Rider: Some life insurance policies offer a long-term care rider, which allows you to use part of the policy’s death benefit to cover long-term care costs, such as nursing home fees or in-home care. This can be especially valuable if you don’t have a separate long-term care insurance policy.
Living benefit riders are available on both term life insurance and the various types of permanent life insurance.
Use Your Life Insurance for Retirement Income
Another way to leverage your life insurance policy is to use it as a source of retirement income:
- Policy Loans and Withdrawals: By taking loans or making withdrawals against the cash value of your policy, you can supplement your retirement income. These funds can be used for anything—travel, healthcare, or everyday living expenses—providing you with greater financial flexibility.
- Annuity Conversion: Some policies allow you to convert the cash value into an annuity, which provides a steady stream of income during retirement. This can be a valuable part of your overall financial planning strategy, especially if you’re looking for a guaranteed income source.
Selling Your Policy Through a Life Settlement
If you no longer need your life insurance coverage or have a different financial situation, a life settlement might be an option:
- What is a Life Settlement?: A life settlement involves selling your life insurance policy to a third party for more than its surrender value but less than its death benefit. This allows you to receive a lump sum of cash that can be used for any purpose.
- Who Qualifies?: Typically, older policyholders or those with a reduced life expectancy qualify for life settlements. This option can be particularly useful if you need immediate cash for medical bills or other expenses.
Cover Final Expenses and Other Financial Needs
Even if you’re not looking to use your policy’s cash value for large expenses, you can still leverage your policy to cover smaller, yet significant, costs:
- Cover Final Expenses: Use a portion of your life insurance benefits as burial insurance, to prepay or cover medical expenses, funeral costs, and other end-of-life expenses. This ensures that your loved ones are not left with these burdens.
- Ensure Financial Protection for Loved Ones: Even while using some of your policy’s benefits, it’s crucial to maintain enough life insurance coverage to provide financial protection for your beneficiaries. This ensures that your family’s needs are met after you’re gone.
Conclusion: Making the Most of Your Life Insurance Policy While Alive
Life insurance is more than just a safety net for after you’re gone—it’s also a versatile tool for achieving financial security while you’re alive. Whether you’re looking to tap into the cash value of a permanent policy, use living benefits for immediate needs, or consider a life settlement, there are multiple ways to utilize your life insurance policy today.
Before making any decisions, it’s essential to consult with a financial advisor or insurance agent to fully understand the implications and benefits of each option.
By doing so, you can make informed choices that align with your overall financial planning goals and provide peace of mind to you and your loved ones.