How to Access Life Insurance While Alive

Life insurance policies, while primarily providing financial protection to beneficiaries after an individual’s passing, also offer policyholders ways to access funds during their lifetime. These options can provide financial flexibility for unforeseen circumstances, long-term care needs, or changes in financial planning.

Accessing Cash Value from Permanent Policies

Permanent life insurance policies, such as whole life, universal life, and variable universal life, accumulate cash value over time. This value grows from premium payments and potential investment growth, offering a living benefit. The accumulation rate and method depend on the policy type; for example, whole life policies offer guaranteed growth, while universal life policies may have adjustable interest rates, and variable universal life policies tie growth to underlying investment performance.

Policyholders can determine their cash value by reviewing policy statements, accessing online portals, or contacting their insurer directly. Cash value can be accessed through policy loans, cash withdrawals, or by surrendering the policy. Each method carries distinct financial and tax implications.

Policy Loans

Taking a policy loan allows borrowing against the cash value. This loan is generally tax-free, considered a debt against the policy, not taxable income. Interest accrues, and if not repaid, the loan will reduce the death benefit. Policy loans do not require credit checks and often have lower interest rates than traditional loans.

Cash Withdrawals

Cash withdrawals reduce the policy’s cash value and the death benefit. They are generally tax-free up to premiums paid. Any amount withdrawn exceeding premiums paid may be subject to income tax. Excessive withdrawals can lead to the policy lapsing if the remaining cash value is insufficient to cover charges.

Policy Surrender

Surrendering the policy involves terminating coverage for the cash surrender value, which is the cash value minus any surrender charges or outstanding loans. This action provides a lump sum but ends the life insurance coverage. The amount received may be subject to income tax if it exceeds premiums paid. To access the cash value, contact your insurer to complete and submit forms.

Utilizing Accelerated Death Benefits

Accelerated death benefits, also known as living benefits, allow policyholders to access a portion of their life insurance death benefit while still alive, typically under certain health conditions. These benefits offer financial relief during severe illness, to cover medical expenses or other costs. Common qualifying triggers include a terminal illness (often defined as a life expectancy of 12 to 24 months) or a chronic illness (involving inability to perform daily living activities). Some policies may also include critical illness riders, allowing access for severe conditions like cancer, heart attack, or stroke.

Policyholders can determine if their policy includes an accelerated death benefit rider by reviewing policy documents or contacting their insurance provider. These riders are sometimes included at no cost, while others may require an extra premium. Eligibility requires medical certification from a physician confirming the qualifying condition and prognosis.

To apply for accelerated death benefits, policyholders should contact their insurer’s claims department to obtain forms. These forms, along with medical documentation from a physician, must be completed and submitted to the insurance company. The insurer will review the claim, which may involve requesting medical information to verify the qualifying condition.

Once approved, the benefit is paid as a lump sum, though some insurers may offer installment payments. The amount received will reduce the policy’s death benefit. Generally, accelerated death benefits are not subject to federal income taxes if the policyholder is terminally or chronically ill, as long as they meet IRS definitions and guidelines.

Selling Your Life Insurance Policy

Selling a life insurance policy to a third party, known as a life settlement, allows policyholders to receive a lump sum cash payment greater than the policy’s cash surrender value but less than the death benefit. For individuals with a terminal or chronic illness, this transaction is called a viatical settlement. In a life settlement, the policyholder transfers ownership to an investor or company, who assumes future premium payments and becomes the beneficiary, receiving the death benefit upon the insured’s death.

Eligibility for a life settlement depends on the policyholder’s age, health status, and the policy’s face amount. Most life settlement providers prefer policyholders to be at least 65 years old and own a policy with a death benefit of $100,000 or more. A decline in health since the policy was issued can improve eligibility and the offer amount, though it is not always a requirement for a life settlement, unlike a viatical settlement where a terminal or chronic illness is central.

The process of selling a policy begins with researching and contacting life settlement providers or brokers. A broker represents the policy seller and can solicit offers from multiple providers, while a provider directly purchases the policy. Policyholders provide information, including policy details and medical records, to obtain quotes.

Upon receiving and reviewing offers, the due diligence phase commences. This involves submitting medical records and policy documents for underwriting by the settlement provider to assess the insured’s life expectancy. Once underwriting is complete, the transfer of policy ownership occurs, and an escrow account is often used to ensure the transfer of funds. The cash received from a life settlement may be subject to income tax, depending on the amount received and the policy’s cost basis.