Life insurance is typically purchased to provide financial protection to the policyholder’s family or dependents in the event of the policyholder’s death. However, some types of life insurance policies can also be used while the policyholder is alive.
In this article, we will discuss various ways to use life insurance while alive.
Withdrawal of cash value
Some life insurance policies, such as whole life insurance, build up cash value over time. Policyholders can withdraw cash from the policy’s cash value while still alive. The amount of cash available for withdrawal depends on the policy’s cash value, which is determined by the premiums paid, the policy’s interest rate, and any applicable fees or charges. Policyholders can use the cash for any purpose they wish, such as paying off debt, funding a child’s education, or covering medical expenses.
Surrendering the policy
Policyholders can also surrender their life insurance policy for its cash value. Surrendering a policy means that the policyholder forfeits the death benefit and any future premium payments in exchange for the cash value of the policy. This option may be beneficial if the policyholder no longer needs the death benefit or is unable to continue paying the premiums.
Using accelerated death benefits
Some life insurance policies offer accelerated death benefits, which allow the policyholder to access a portion of the death benefit while still alive if they are diagnosed with a terminal illness. This option can help the policyholder cover medical expenses or other costs associated with the illness.
Taking out a loan against the policy
Policyholders with cash-value life insurance policies can also take out a loan against the policy. The loan is secured by the policy’s cash value, and the policyholder must repay the loan with interest. This option can be useful if the policyholder needs funds for a specific purpose, such as starting a business or making home repairs.
Using the policy as collateral
Some lenders may accept a life insurance policy as collateral for a loan. This can be an option for policyholders who need to borrow money but do not want to take out a loan against their home or other assets. However, using a life insurance policy as collateral means that the death benefit may be reduced if the loan is not repaid.
Selling the policy
Policyholders can also sell their life insurance policy to a third party for a lump sum payment. This is known as a life settlement. The amount of the settlement depends on the policy’s death benefit, cash value, and other factors. This option may be beneficial if the policyholder no longer needs the death benefit or is unable to continue paying the premiums.
Using the policy for charitable giving
Policyholders can also use their life insurance policy for charitable giving. They can name a charity as the beneficiary of the policy, which means that the charity will receive the death benefit when the policyholder passes away. Alternatively, policyholders can donate their policy to a charity, which allows the charity to access the policy’s cash value while the policyholder is still alive.
Using the policy for estate planning
Life insurance can also be used as part of an estate plan. Policyholders can name their heirs as the beneficiaries of the policy, which can help provide financial security for their loved ones after they pass away. Life insurance can also be used to pay estate taxes or to equalize an inheritance if one child receives more than another.
Using the policy for business purposes
Life insurance can be used for business purposes, such as funding a buy-sell agreement or key person insurance. A buy-sell agreement is a contract between business partners that ensures that if one partner dies, the other partners can buy out their share of the business.
Key person insurance helps protect a business from financial loss if a key employee or executive passes away. In both cases, life insurance can provide the necessary funds to buy out the deceased partner’s share of the business or to cover the financial loss caused by the loss of a key employee.
Using the policy for long-term care
Some life insurance policies offer long-term care riders or benefits, which allow policyholders to use the death benefit to pay for long-term care expenses if they become chronically ill or disabled. This option can help policyholders avoid depleting their retirement savings or relying on Medicaid to pay for long-term care.
Conclusion
Life insurance policies can be used for a variety of purposes while the policyholder is still alive. The options available depend on the type of policy and the specific features it offers. Policyholders should carefully consider their needs and options before making any decisions about using their life insurance policy while alive. Getting advice from a financial advisor or insurance expert can also be helpful in deciding what to do.
