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Using Life Insurance While Alive

Life insurance is meant to be a boon to your family when you die, but there are some benefits you can tap into your policy sooner if necessary.

Written by Devon Delfino / July 22, 2022

Quick Bites

  • There are several options to use life insurance while you’re alive, but your policy age and type may determine which ones you can access.
  • For example, if your policy builds cash value, you may be able to withdraw or take out a loan from those funds.
  • Selling your life insurance can also be an option—but it’s best used as a last resort.

Life insurance is primarily used to leave a source of income for family members. However, that doesn’t mean that you can’t tap into some useful aspects of your life insurance policy while you’re still alive, whether that’s to help you build long-term wealth, or help you get through a tough time. We’ll explain more in this article.

Inside this article

  1. Life insurance
  2. Life insurance while alive
  3. Tapping into the cash value
  4. Apply for living benefits
  5. Sell it

A little background on life insurance

Life insurance is a financial tool that you pay into for either a set period, like 20 years (term), or for life (permanent). The features that come with the policies can depend on the type of policy you get.

In general, as long as your policy is active upon the policyholder’s death—meaning you’re current on the monthly premiums—the insurance company would pay out a specific amount (known as the death benefit) to the life insurance policy beneficiaries. Often, people choose a spouse or kids or other dependents as the beneficiaries so that they can have a source of cash to help replace your income without having to resort to steps like selling a house or a business. That payout is usually tax-free.[1]

How do you use life insurance while alive?

There are three ways that you can use life insurance while you’re still alive: accessing cash value (this doesn’t apply to term policies), using your living benefits (these also have requirements) and selling your policy.[2] These all come with pros and cons, so it’s important to understand how they work before going forward.

Tapping into the cash value

Permanent life insurance policies—like whole and universal life insurance—can build cash value over time because, as you make premium payments, part of that amount is set aside and invested. If you have one of these policies, you have a few options to use that cash while you’re still alive:

  • Withdraw money from the cash value

  • Take out a loan from the cash value

  • Use the cash value to help pay your premiums[2]

“When done correctly, these withdrawals should be entirely tax-free, with the typical situation being cash surrenders up to cost basis, and then loans after that,” says Zachary Rawlings, a partner at Contego Advisors. “At death, the loans are paid off from the tax-free death benefit, and any death benefit leftover is paid to the beneficiaries tax-free.”

It’s important to note, however, that most permanent insurance policies won’t have cash value until after the first or second year of having the policy.[1]

“If possible, it's best to use a collateralized loan from a bank, usually set up as a line of credit, for loans instead of the insurance company as they typically offer lower interest rates,” he says.

There is another option here, as well: You can surrender the policy for its cash value. However, this effectively cancels your policy and may come with a surrender fee, so it’s often not a good option for those who will require coverage later on.[2]

Apply for living benefits

Many life insurance policies also come with living benefits, often via a life insurance rider, or add on, that can come at an extra cost.[3]

“Most common are a disability waiver of premium, which can cover the cost of the premium if the insured gets disabled, and a long-term care rider,” Rawlings says. “While these vary by company, generally they allow the insured to use up to 90% of the death benefit for purposes of long term care, if they require assistance with two of the six activities of daily living.”

Those activities include:

  • Ambulating

  • Feeding

  • Dressing

  • Personal hygiene

  • Continence

  • Toileting[4]

Typically, you’d submit a claim to access these benefits. This includes providing evidence that you meet the requirements, which may include things like medical documentation. However, the payouts can range dramatically: You may get anywhere from 25% to 95% of your death benefit.[5]

Sell it

Another option is to sell your life insurance policy. However, it’s important to note that this has some significant downsides. That’s because life insurance typically costs more as you get older. And you may not be able to qualify later in life due to health or age requirements.[6] So if you’ll still need coverage later on, it may not be a good option.

“Selling a life insurance policy, in my opinion, is an option of last resort,” says Rawlings. “If a person is in need of cash, they can potentially sell the policy to an investor for a percentage of the death benefit, and that person gets paid when the insured eventually passes.”

When you sell your policy, the amount that you’d receive is typically taxable income. So you’d have to set aside some of that money for taxes. With this option, you’d get less than the full death benefit, but more than if you opted to surrender the cash value.[7] And creditors may be able to lay claim to some of the payout.[8]

How Does Life Insurance Pay Out?

How Does Life Insurance Pay Out?

Life insurance pays out in a lump sum or in installments, usually within 30 days. There are, of course, exceptions.

Find out more

“If the insured is in need of money for things like medical expenses, it's almost always preferred to instead either take a loan against the cash value, or try to utilize the ‘acceleration of death benefit’ feature that most policies—even term insurance—possess,” says Rawlings. That way, you’d be able to still receive at least some of the death benefit and keep your policy active. “This is almost always much better than selling the policy itself.”

Article Sources
  1. “What is life insurance, and how does it work?.” Guardian Life. https://www.guardianlife.com/life-insurance/what-is-life-insurance.
  2. “What is cash value life insurance?” Allstate. Aug. 2021. https://www.allstate.com/resources/life-insurance/cash-value.
  3. “Living Benefits of Life Insurance.” American Family Insurance. https://www.amfam.com/resources/articles/navigating-life-insurance/living-benefits-of-life-insurance.
  4. “Activities of Daily Living.” National Library of Medicine: National Center for Biotechnology Information. May 2, 2022. https://www.ncbi.nlm.nih.gov/books/NBK470404/.
  5. “Accelerating Life Insurance Benefits.” American Council of Life Insurers. https://www.acli.com/Consumer-Info/Life-Insurance/Accelerating-Life-Insurance-Benefits.
  6. “How to buy life insurance.” Guardian Life. https://www.guardianlife.com/life-insurance/how-to-buy.
  7. “Sell A Life Insurance Policy: Everything You Need To Know.” American Life Fund. Dec, 30, 2021. https://www.americanlifefund.com/can-you-sell-your-life-insurance-policy/.
  8. “Selling Your Life Insurance Policy: What you should know about Life and Viatical Settlements.” State of Connecticut Insurance Department. https://portal.ct.gov/CID/Fraud/Fraud/Selling-Your-Life-Insurance-Policy-What-you-should-know-about-Life-and-Viatical-Settlements.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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