How to Use Life Insurance While Alive

Life insurance policies offer financial protection for beneficiaries after a policyholder passes away. These financial tools can also provide benefits and resources while the insured individual is still alive. Understanding how to access these living benefits can help policyholders manage various financial needs or unexpected life events.

Accessing Policy Cash Value

Whole life and universal life policies build cash value over time. This cash value grows tax-deferred, unlike term life insurance. Policyholders can access this savings component during their lifetime.

Policyholders can take a loan against their accumulated cash value from the insurer, collateralized by the policy. Loans are generally not subject to income tax if the policy remains in force. Unpaid loans and accrued interest reduce the death benefit.

Policy withdrawals allow direct removal of cash value. Withdrawals reduce both the cash value and the death benefit. They are generally tax-free up to premiums paid (cost basis). Amounts exceeding total premiums paid may be taxable.

Policyholders can surrender their life insurance policy, terminating the contract for its cash surrender value. This ends the policy’s death benefit and future coverage. Any amount received exceeding total premiums paid is typically taxable.

Tax implications vary by access method. Policy loans are generally tax-free. Withdrawals and surrenders are tax-free up to premiums paid, but gains above premiums are usually taxable. Consult a tax professional for specific advice.

Leveraging Living Benefit Riders

Life insurance policies can include living benefit riders, providing financial benefits while the policyholder is alive. These riders allow access to a portion of the death benefit, often triggered by a health event. They are typically added at policy purchase.

Accelerated Death Benefit (ADB) riders allow access to a portion of the death benefit if diagnosed with a terminal illness, typically with a prognosis of 24 months or less life expectancy. The amount received reduces the death benefit.

Chronic illness riders provide access to a portion of the death benefit if the policyholder cannot perform Activities of Daily Living (ADLs) or has severe cognitive impairment. These riders help cover long-term care costs. The payout reduces the policy’s death benefit.

Critical illness riders offer a lump sum payment upon diagnosis of a specified critical illness, such as a heart attack, stroke, or certain cancers. Covered illnesses vary by policy. Receiving a payout reduces the death benefit.

Long-Term Care (LTC) riders cover qualified long-term care expenses. They offer comprehensive benefits for services like nursing home care, assisted living, or in-home care. Using these benefits reduces the policy’s death benefit.

Riders accelerate a portion of the death benefit while alive. Benefits require specific medical conditions and certifications outlined in the terms. Rider availability and provisions vary among providers and policy types.

Alternative Policy Uses

Beyond cash value access or health-triggered benefits, life insurance policies offer other financial uses. Policy cash value can collateralize a loan from a bank or financial institution. This differs from a policy loan, as the lender is a third party.

Using a policy as collateral grants the lender rights to its cash value or death benefit upon loan default. If the loan is not repaid, the lender can claim the collateralized portion. Terms are set by the third-party lender.

A viatical settlement allows a policyholder with a terminal or chronic illness to sell their life insurance policy to a third-party company. The policyholder receives a lump sum, typically less than the death benefit but more than the cash surrender value.

The third-party company becomes the new owner and beneficiary, assuming responsibility for future premiums and receiving the full death benefit. Viatical settlements provide immediate liquidity for those facing severe health challenges and expenses.

Tax implications for viatical settlements vary. Proceeds may be tax-exempt if the policyholder is certified as terminally ill (24 months or less life expectancy) or chronically ill under specific conditions. Federal and state rules apply. Consult a tax professional for specific treatment.

Accessing Policy Cash Value

Accessing a life insurance policy’s cash value provides financial flexibility. Policyholders can obtain funds through policy loans, withdrawals, or by surrendering the policy. Each method has distinct financial and tax implications that should be carefully considered. Understanding these options is key to leveraging a policy’s living benefits effectively.

Leveraging Living Benefit Riders

Living benefit riders offer critical financial support during unforeseen health challenges. These riders allow policyholders to access a portion of their death benefit early, providing funds for terminal, chronic, or critical illnesses. The specific conditions for activation and the impact on the remaining death benefit vary by rider and policy.

Alternative Policy Uses

Life insurance policies can serve as more than just a death benefit. They can be used as collateral for external loans, providing a different avenue for liquidity. Additionally, viatical settlements offer a way for individuals with severe illnesses to sell their policy for immediate cash. These alternative uses provide unique financial solutions for specific circumstances.