Can You Cash In Life Insurance While Still Alive?

Life insurance policies, particularly those with a cash value component, can serve as a financial resource during your lifetime, offering flexibility for various life stages or unexpected circumstances. This guide explores methods for accessing your policy’s value, utilizing specialized benefits, and even selling your policy to a third party.

Accessing Your Policy’s Cash Value

Permanent life insurance policies, such as whole life or universal life, build a cash value over time. This cash value accumulates on a tax-deferred basis. A portion of each premium payment contributes to this cash value, which can then be accessed through several methods.

Policy Surrender

Policy surrender involves terminating the life insurance contract in exchange for its cash surrender value. This value represents the accumulated cash value minus any surrender charges, outstanding loans, or fees. Surrender charges, typically 10% to 35% and decreasing over 10 to 15 years, can reduce the payout, especially if surrendered early. Contact your insurer and submit a surrender request form. Funds are typically received within two to six weeks. Any amount received above the total premiums paid may be taxable as ordinary income.

Policy Loan

Policy loans allow you to borrow directly from the insurer, using your cash value as collateral. No credit check or formal approval is needed, as the policy secures the loan. Policy loans are generally tax-free, provided the policy remains in force and is not a Modified Endowment Contract (MEC). If the policy lapses or is surrendered with an outstanding loan, the unpaid loan amount may become taxable. Interest accrues on policy loans, often at competitive rates, typically between 5% and 8%. While repayment is flexible, any outstanding loan balance will reduce the death benefit paid to your beneficiaries. You can typically borrow up to 90% of the cash value, though it may take years to build sufficient value for a substantial loan.

Partial Withdrawals

Partial withdrawals are another way to access cash value. Unlike loans, withdrawals directly reduce the policy’s cash value and typically decrease the death benefit. Withdrawals are generally tax-free up to the amount of premiums you have paid into the policy, which is considered your cost basis. Any amount withdrawn that exceeds your cost basis is usually taxable as ordinary income. Review your policy documents or contact your insurer to understand specific terms and confirm options. Obtain and complete necessary forms. Processing times for withdrawals and loans are generally a few business days to a couple of weeks.

Utilizing Living Benefits Riders

Living benefits, or accelerated death benefits, are riders that allow access to a portion of your policy’s death benefit while you are still alive. These riders are triggered by specific qualifying events, providing financial relief during severe health challenges. They can be included with both permanent and some term life insurance policies.

Common qualifying events include:
Terminal illness, where a physician certifies a limited life expectancy, typically 12 or 24 months or less.
Chronic illness, often defined as the inability to perform at least two out of six Activities of Daily Living (ADLs)—such as bathing, dressing, eating, continence, toileting, and transferring—without assistance, or severe cognitive impairment.
Critical illness, which provides a lump-sum payment upon diagnosis of a specified severe condition, such as a heart attack, stroke, or cancer.

The benefit received is usually a percentage of the death benefit, which then reduces the remaining death benefit payable to beneficiaries upon the insured’s death. Review your policy documents or contact your insurer to understand specific definitions and activation conditions, such as medical certification requirements.

To file a claim, submit necessary medical documentation. The insurer will review it to ensure it meets policy criteria. Once approved, the funds are typically disbursed as a lump sum or in periodic payments. Accelerated benefits are generally tax-exempt for individuals certified as terminally ill or for chronically ill individuals if the proceeds are used for qualified long-term care expenses. However, if the benefits for chronic illness exceed IRS per diem limits and are not used for qualified long-term care expenses, the excess amount could be taxable.

Selling Your Life Insurance Policy

Selling your life insurance policy to a third party is known as a life settlement or, for the terminally or chronically ill, a viatical settlement. This process involves selling the policy for a cash payment that is typically more than its cash surrender value but less than the full death benefit. The third-party buyer assumes ownership of the policy, takes over premium payments, and becomes the beneficiary, receiving the death benefit when the insured passes away.

A life settlement generally applies to policies held by individuals who are typically 65 years or older, or those with serious health conditions. Eligibility criteria for policies often include universal life and whole life policies with a death benefit of at least $100,000, though some term policies may qualify if convertible to permanent insurance.

To begin, gather necessary policy information and medical records. Research and identify licensed life settlement providers or brokers. Brokers can shop your policy to multiple providers for a competitive offer. Once you submit your policy for evaluation, buyers assess your life expectancy based on your medical records and make an offer.

The application process involves submitting documents and undergoing an underwriting review. If an offer is accepted, policy ownership transfers to the buyer. Funds are then disbursed, often placed in an escrow account during the transfer process. The sale of a life insurance policy has distinct tax implications. Viatical settlements are generally tax-free if the policyholder is terminally ill (life expectancy 24 months or less) or chronically ill, provided specific IRS requirements are met. For life settlements, proceeds are taxed in tiers: the amount up to your cost basis (total premiums paid) is tax-free, the amount above the cost basis up to the cash surrender value is taxed as ordinary income, and any remaining proceeds are taxed as capital gains. The process, from application to funds, can take several months.