Life insurance is commonly associated with providing financial protection to loved ones in the event of the policyholder’s death. However, many people are unaware that life insurance can also offer provide opportunities to enhance financial security and address pressing needs while they’re still alive.
Most of the benefits we’ll look at are typically associated with types of life insurance policies known as permanent life insurance policies, such as whole life insurance or universal life insurance. While a term life insurance policy provides a valuable death benefit, this type of policy doesn’t offer any financial advantages while you're still alive.
What are the living benefits of life insurance?
When buying life insurance, most people receive their new life insurance policy and file it in a desk drawer or file cabinet containing other important documents. Unfortunately, if you’ve purchased whole, universal or variable life insurance, you’re filing away some “living benefits” of the policy that you could be taking advantage of.
In this way, insurance can be super valuable, not just for your dependents, but for you while you’re still alive. It can come in handy particularly when it comes to paying for long-term care expenses, providing money if you’re diagnosed with a terminal illness or supplementing your retirement income.
Certain life insurance policies offer long-term care riders. This means that if you require long-term care services, such as assistance with daily activities or nursing home care you can use life insurance. You can access a portion of the death benefit to help cover these expenses.
2. It can help out if you have a terminal illness
Some life insurance policies include an accelerated death benefit rider or illness rider. This allows you to access a portion of the death benefit if you’re diagnosed with a qualifying terminal illness or a chronic illness that meets your policy’s criteria. These funds can be used in any way you’d like, such as covering medical expenses, enjoying travel or leaving a legacy while you’re still living.
3. It add to your retirement income
In some cases, you can use the cash value accumulated in a permanent life insurance policy to supplement your retirement income. This is often achieved by purchasing an annuity that provides a regular income stream.
Using your living benefits can reduce the death benefit amount paid to your beneficiary when you pass away. It’s important to review your policy documents and speak with your insurance agent or financial advisor to fully understand your policy's specific features, limitations and requirements.
4. It can give you a low-interest loan
If you’ve built up sufficient cash value in your permanent life insurance policy, you can take out policy loans. The accumulated cash value serves as collateral, and you can borrow against it at a relatively low interest rate. Some policies contain a “wash loan” provision, which is essentially a zero-interest loan.
5. You can withdraw money to fund expenses
Permanent life insurance policies also enable you to withdraw a portion of the cash value or your policy value you’re alive. If you make policy withdrawals that affect your surrender value, keep in mind that it could impact your income taxes, so it’s important to consult with a tax professional before making withdrawals.
Both loans and withdrawals can be advantageous when you’re living. You can leverage your policy’s cash value to:
Help with the down payment on a new home
Help fund your child’s education
Provide cash in the event of an emergency
Provide liquidity for business opportunities
Pay for expenses related to a critical illness or other medical bills
Help pay for long-term care or home health care
Supplement your retirement income
Pay estate taxes
6. You can sell it
Perhaps the most underutilized and least understood benefit of owning a life insurance policy is its “life settlement” potential. A life settlement is a financial transaction where a life insurance policyowner sells their life insurance policy to a third party for a lump sum cash payment. This can be done because a life insurance policy is considered “personal property,” just as anything else you own is.
Most life insurance companies and brokers will help policyowners aged 65 or older with a permanent life insurance policy face value of $100,000 or more sell their life insurance policy. Each state strictly regulates these companies and brokers.
Life settlements typically provide a lump sum payout that is higher than the policy’s surrender value but less than the death benefit. This can unlock a substantial amount of money that can be used to address immediate financial needs or help you invest in other opportunities.
The proceeds of a life settlement come with no restrictions. You’re free to use the funds according to your specific needs, whether for meeting expenses or simply enhancing your quality of life.
Before having your life insurance policy appraised by a life settlement professional, consider that if you sell the policy, your beneficiary will no longer receive the policy’s death benefit or benefit from the life insurance coverage. The new policyowner will select a new beneficiary and make future premium payments.
Reasons for pursuing life settlement
Changing financial priorities: you may have evolving financial needs, such as paying off debts, covering medical expenses, or funding a business venture.
The policy is no longer needed: your life insurance protection may no longer be necessary due to changes in your circumstances, such as your children becoming financially independent.
Premium affordability: increasing premiums may become burdensome as you get older.
Avoiding a policy lapse: you may prefer to utilize the policy’s value rather than let it lapse if you no longer wish to keep it.
By understanding and leveraging the value of your life insurance while you’re still alive, you can enhance your financial well-being, address immediate needs and gain greater control over your financial future. As with any financial decision, it’s crucial to seek advice from qualified professionals and carefully evaluate the implications before proceeding with any insurance options.
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