Owning life insurance continues to be a top priority for several Americans. According to data, over 172 million Americans own life insurance. This includes 34% of the population aged between 18 to 24.
Life insurance is often meant to benefit your loved ones after you pass on. However, life insurance policyholders can enjoy several benefits of their life insurance policies while still alive. These include taking low-interest loans, paying for long-term care, and adding to their retirement income.
Which life insurance policies allow you to take some benefits while still alive, and how can you access these benefits? Here's what you need to know.
What is Cashing Out a Life Insurance Policy?
Cashing out a life insurance policy refers to life insurance policyholders accessing the accumulated cash value of their policies before their death.
Typically, life insurance works by policyholders paying premiums to get coverage against their death when they pass on. With some policies, you get living benefits allowing the policyholder to fund their retirement before death.
Life insurance policies such as variable, whole, and universal life, which accumulate cash value, offer more cashing-out benefits, allowing the policyholder to access some of that money while alive through withdrawals, loans, surrendering, or selling the policy.
There's no real difference between cashing out and cashing in a life insurance policy. Both terms are typically used interchangeably.
What Types of Life Insurance Build Cash?
Only select types of life insurance policies build cash value. These are permanent life insurance policies, including universal and whole life insurance. Term life insurance policies do not accumulate cash value. However, they may offer living benefits you can access while still alive.
Universal Life Insurance
Universal life insurance is a permanent life insurance policy offering the option of investing the cash value accumulated in your policy so that the market dictates the growth of the cash value.
Whole Life Insurance
Whole life insurance is permanent life insurance lasting the rest of your life with an accumulating cash value. The life insurance company determines the growth rate of your cash value component.
Premiums for whole life insurance are typically five to fifteen times the amount you'd pay for a term life insurance policy with similar face value.
Term Life Insurance
Term life insurance policies primarily offer financial protection in case of your death. They don't build cash value, albeit they may provide living benefits in the form of riders.
Some of the most common living benefits from term life insurance include the critical illness rider and the accelerated death benefit rider.
If you make a claim on any of these policies, the insurer gives you an amount taken from the policy's death benefit. However, you can still get cash from a term life policy while still alive.
Some of the Ways You Can Use Life Insurance While Alive
Here are the different ways you can use your life insurance while still alive.
Helping Out with Terminal Illness
Term life insurance policies often include an illness or accelerated death benefit rider. This allows you to access a portion of your death benefit if you're diagnosed with a chronic illness or qualifying terminal illness that meets the policy's criteria.
You can use these funds in any way, such as traveling, covering medical expenses, or leaving a legacy while still alive and battling the illness.
It Can Help You Pay for Long-Term Care
Certain life insurance policies allow for long-term care riders. Therefore, you can acquire long-term care services such as getting into a nursing home or receiving assistance with daily activities through the life insurance policy.
Insurers often use part of your death benefits to cover these expenses.
You Can Get a Low-Interest Loan
Some life insurance policies allow you to take out a loan based on the existing cash value. If you pass on before fully repaying your loan, the insurer will charge the amount you owe out of the death benefit before your beneficiaries receive it.
Nonetheless, loans from a life insurance policy are often low-interest, making them a more viable option over credit cards and taking personal loans. Usually, insurers won't check your credit before issuing the loan, with better repayment terms than other types of loans.
It Can Add to Your Retirement Income
In some instances, you can use the accumulated cash value in your permanent life insurance policy to supplement your income on retirement. Most insurers require you to purchase an annuity that gives you a regular income stream.
You Can Sell It
Selling your life insurance policy is often not worth the trouble or cost. Regardless, if you desperately need cash, you can use a reputable broker to sell your policy and get money for other emerging needs.
However, selling your life insurance can come with high brokerage fees, sometimes as high as 30% of the profit. You'll also be subject to taxes from the sale, and you'll most likely not get your total benefit amount either.
Therefore, selling your life insurance policy, often called a life settlement, is advised as a last resort for policyholders who can't afford to pay for their coverage anymore. You're better off accessing your policy's cash value in another way or finding an alternative funding source for your pending needs.
You Can Withdraw It to Fund Expenses
Permanent life insurance policies allow you to withdraw a portion of your cash or the policy's value while still alive. However, if you make withdrawals that affect your surrender value, your income taxes may be affected.
Therefore, you should consult a tax professional before withdrawing from your permanent life insurance policy.
Taking loans and withdrawals from your permanent life insurance policy can help you settle financial obligations such as making a down payment for a new home, consolidating debts, funding your children's education, and paying for medical expenses related to a critical illness or other bills.
Get the Most Favorable Life Insurance Policy from an Expert
Life insurance policies are designed to protect your loved ones from the financial turmoil of losing you once you pass on. However, there are several ways you can explore to get value from your policy while still alive and reduce some financial burden from your end or set up your loved ones for life after you've passed on.
Contact an insurance expert and learn which policy will favor your needs while you are alive.