3 Ways to Use Life Insurance While You’re Still Alive
Life insurance can seem like a necessary evil. In fact, says Kimberly Dula, partner with accounting firm Friedman LLP in New York City, “many of [my clients] don’t look at their life insurance as an asset at all.” Instead, she says, they see it as a monthly bill from which they will never personally see any benefit.
That’s a misguided view of life insurance, according to some experts. “It has many more uses than just for a death benefit,” says Ray Caucci, senior vice president for product management, underwriting and advanced markets for Penn Mutual Life Insurance Company.
Here are three ways to access the value of a life insurance policy while you’re still alive.
1. Tap into its cash value. Life insurance comes in two basic forms: term life and permanent life. Term life insurance is the less-expensive option and will pay out a death benefit should a policyholder die while the plan is in effect. Permanent life is more expensive, but it has an investment component that allows policies to build a cash value over time.
“The life insurance industry has gotten a bit of a bad reputation because of the high [fees] on them,” says Craig Simms, senior vice president of sales and marketing for Vantis Life Insurance Company. However, permanent life insurance can still be an attractive choice for those who want to ensure they always have access to coverage. Plus, its cash value means policyholders have a ready source of money that can be used for any reason.
People can tap into a plan’s cash value in one of three ways:
- Loans: Rules may differ by company, but most allow people to take out a loan from the accumulated cash value for any reason. There is no set repayment schedule for these loans, but they will accumulate interest charges that can reduce the death benefit.
- Withdrawals: Policyholders can withdraw money from the cash value and not worry about interest charges. However, a withdrawal may change policy premiums and could affect the death benefit.
- Surrender: Surrendering a policy means canceling it. That releases all the cash value to the policyholder. However, a person should be sure he or she doesn’t need the coverage or can get coverage elsewhere before taking this step.
When it comes to deciding between a loan and a withdrawal, Caucci says a loan provides more options for policyholders. They can choose not to repay the loan, but they also have the option to make payments that will maintain the death benefit and restore the cash value. “If you take a withdrawal, it’s a lot harder to get the values back to where they were,” he says.
2. Apply for living benefits. Living benefits are another way to tap into the value of a life insurance policy while someone is still alive. These benefits typically allow a portion of the death benefit – usually up to 50 percent – to be paid in advance should certain criteria be met. “We don’t want to completely extinguish the [death] benefits,” Simms say. “That’s why it’s limited to a percentage.”
These accelerated benefits are most commonly available in the following forms:
- Chronic illness benefits: A chronic illness is often defined as needing assistance with at least two out of six activities of daily living, such as bathing, dressing or eating.
- Terminal illness benefits: Those who have been certified as terminally ill by a physician and have a life expectancy of fewer than 12 months may also be able to access living benefits.
- Long-term care benefits: Long-term care benefits may be available at an added cost. “These are a bit more expensive, but they have a great potential for coverage,” Caucci says. That’s because long-term care riders may include additional benefits beyond the policy’s death benefit.
These benefits may come standard on some policies but be offered only as riders on others. While most people understand the cash value of policies, “the industry needs to do a better job of educating the public on these options,” Simms says.
3. Sell the policy. Life settlements offer a final option for those who want to access money from their life insurance policy prior to death. “What’s happening, in essence, is that you’re selling your policy,” Dula says.
The settlement may pay a lump sum or provide an annuity that offers regular periodic payments. Policies are typically purchased by investors on the secondary market for an amount that is more than the cash value but far less than the full value of the policy. The new owner takes over premiums payments and becomes the beneficiary of the death
A life settlement can be preferable to letting a policy lapse, but it may only be available to those who are older or who have a certain level of death benefit. It’s best to work with an experienced broker to get the best payout possible. “Make sure you’re working with an insurance provider that you know, that you like and that you trust,” Dula says.
While the main purpose of life insurance is to provide a death benefit that supports loved ones or create a lasting legacy, that doesn’t mean you can’t also reap the benefits of these policies while you’re still alive. If you need cash now, consider whether one of these three options is right for you.