Life insurance is often seen as financial protection for surviving family members after the death of an insured. But depending on the type of policy you have, you may also have coverage during your lifetime. You could potentially borrow against your policy, withdraw cash value accumulated over time, use a living benefit rider, or sell your policy.
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Each option has its pros and cons, but it helps to understand how you might use your life insurance during your lifetime should the need arise. Here’s what to know about your options.
Take a loan or withdrawal from your policy
It may be possible to take out 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 offer these options.
Taking a loan from your life insurance policy involves borrowing against its cash value. This option is usually only available if you have been paying your life insurance premiums for several years, as it takes time for your policy to start accumulating cash value. Life insurance loans generally have a lower interest rate than personal loans or mortgages, and repayment may be optional.
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A loan can be a good option if you need cash, but also want to pay off your loan to keep your death benefit in full. You can choose not to pay it back, but there’s a downside: your death benefit may be reduced by the amount you borrowed plus accrued interest.
In some cases, you can also withdraw cash value from your policy. The amount withdrawn may not be taxable, assuming it is less than what you contributed to the contract. Although a tax-free withdrawal can be useful to cover a large expense or supplement your retirement savings, it will generally reduce your total death benefit. This can be a disadvantage, depending on your financial situation.
Use your cash value to pay premiums
If your policy permits, you can also use your accumulated cash value to offset the cost of your premiums. But that’s usually only an option with permanent life insurance policies, not term life insurance coverage.
Still, it can be advantageous if you have a fixed income. For example, many retirees choose to tap into the cash value of their coverage to pay premiums because it allows them to retain their life insurance while keeping costs low.
Use your Living Benefit rider
Some insurers offer a living benefit rider on qualifying policies. This type of rider allows you to get a portion of your death benefit sooner if you are diagnosed with a terminal illness and have a life expectancy of less than a year. Early access to your death benefit can help cover the cost of medical expenses associated with your illness and can provide access to palliative care options that would otherwise be unaffordable.
Living benefits riders are often provided as standard with some policies, but fees may apply when you exercise this benefit. Even so, tapping into a living benefit could be worth it if it translates into significant savings on medical costs.
Sell your policy
Although it’s not worth it or the cost, selling your life insurance policy may be another option if you need the cash. If you decide to go this route, you can do so through a reputable broker, but expect to pay brokerage fees. Depending on the broker, your fees can represent up to 30% of the profit from the sale. You will also have to pay taxes on the amount you receive. And you won’t get the full amount of your benefits when you sell your policy either. The percentage you get may partly depend on the broker you use.
Selling a life insurance policy, commonly known as a life settlement, is generally considered a last resort for policyholders who can no longer afford their coverage. It is generally not recommended if you can access the cash value of your policy in another way or find another source of funding.
The essential
Although life insurance pays a death benefit when you die, you can also use your policy while you are alive in certain circumstances. You may be able to withdraw accumulated cash value, take out a loan on 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 it will cost you fees and tax payments.
Tips for buying life insurance
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Life insurance can play an important role in your financial plan. A financial adviser can help you understand your needs and possibly put you in touch with a policy that suits you. SmartAsset’s Matching Tool can help match you with financial advisors in your area. Within minutes, you have someone by your side who can give you sound financial advice tailored to your situation. So if you’re ready to start your investing journey, start now.
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When shopping for life insurance, you will need to decide if you want a term or permanent life insurance policy. Although the former only covers a certain number of years, it is generally more affordable than permanent insurance. If you opt for the latter, you’ll have to choose between full, universal, and variable fonts, all with varying costs and features.
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