Can You Use Term Life Insurance While Alive?

Term life insurance is primarily known for providing a financial safety net to beneficiaries upon the policyholder’s death. However, questions often arise about whether this type of insurance can offer benefits while the insured individual is still alive. While traditional term life insurance focuses on a death benefit, evolving policy features and optional additions allow for certain circumstances where policyholders can access funds before their passing.

Core Characteristics of Term Life Insurance

Term life insurance provides coverage for a specific period, known as the “term,” which can range from one year to 30 years or more. If the insured person passes away within this defined term, the policy pays a pre-determined death benefit to the designated beneficiaries. This financial payout serves to replace lost income, cover debts, or provide for future expenses, offering crucial financial protection to loved ones.

A fundamental aspect distinguishing term life insurance from other types of life insurance is its temporary nature and its typical lack of a cash value component. Unlike permanent life insurance policies, term policies do not accumulate a savings or investment element over time. The premiums paid for term life insurance are solely for the cost of insurance coverage during the specified term.

Upon the expiration of the term, the coverage ceases unless the policy is renewed or converted. Renewing a term policy often comes with significantly higher premiums, as the insured is older and potentially has more health risks. The straightforward design of term life insurance makes it a cost-effective option for individuals seeking substantial coverage for a defined period without a savings feature.

Accessing Benefits Through Riders

While term life insurance primarily provides a death benefit, policyholders can access funds while alive through specific optional additions called “riders.” These riders, often referred to as living benefits, accelerate a portion of the death benefit under qualifying circumstances. The most common mechanism for this early access is the Accelerated Death Benefit (ADB) rider.

The Accelerated Death Benefit rider allows the policyholder to receive a portion of their policy’s death benefit if they experience a severe health event. This advance on the death benefit can be used for any purpose, such as covering medical expenses, making home modifications, or simply improving quality of life during a challenging period. Any amount received through an ADB rider directly reduces the death benefit that will eventually be paid to beneficiaries.

One common trigger for an ADB payout is a terminal illness diagnosis. A terminal illness is generally defined as a condition where a medical professional certifies that the insured has a limited life expectancy, typically 12 to 24 months, regardless of further treatment. To qualify, insurers usually require documentation from one or two medical practitioners confirming the diagnosis. The payout often comes as a lump sum, which is generally not subject to federal income tax for terminally ill individuals under Internal Revenue Code Section 101(g).

Critical illness riders provide a payout if the policyholder is diagnosed with specific severe health conditions, such as a heart attack, stroke, or certain types of cancer. The list of qualifying illnesses varies by insurer, and there may be waiting periods after the rider is added before a claim can be made, as well as a survival period after diagnosis. The funds received are typically a lump sum.

A chronic illness rider allows access to funds if the insured requires long-term care due to an inability to perform a certain number of Activities of Daily Living (ADLs). These ADLs typically include:
Bathing
Continence
Dressing
Eating
Toileting
Transferring
A cognitive impairment requiring substantial supervision, such as severe dementia, can also qualify for benefits. Payments for chronic illness benefits are intended to be tax-free, but may require annual recertification by a healthcare provider.

Many insurers include an Accelerated Death Benefit rider at no additional upfront cost, though some may charge a fee if the benefit is accessed. If there is a cost, it might be integrated into the premium or charged as a processing fee upon claim. The amount that can be accelerated typically ranges from 25% to 95% of the death benefit, with specific limits set by the insurer and policy terms.

Limitations on Living Benefits

Despite the availability of living benefit riders, term life insurance has inherent limitations regarding accessing funds during the policyholder’s lifetime. A primary characteristic of term life is its lack of cash value accumulation. Unlike certain permanent life insurance policies, term policies do not build a savings component over time.

Because there is no cash value, term life insurance policies do not allow for borrowing against the policy. Policy loans are typically only available with permanent life insurance products that accrue a cash value. This means that policyholders cannot use their term life policy as collateral to secure a loan for personal or business needs.

Furthermore, term life insurance generally offers no surrender value. If a policyholder decides to cancel or allow a term policy to lapse before the end of its term, there is typically no cash payout or refund of premiums. The premiums paid cover the cost of insurance protection for the specified period, and once that coverage ends without a death benefit claim, the financial value of the policy ceases.

Term life insurance is not designed as an investment vehicle. Its sole purpose is to provide a death benefit for a defined period, offering financial protection to beneficiaries. While riders can provide access to funds in specific health crises, these are distinct from investment returns or savings growth.