How to Use Life Insurance While Alive

5 ways to Use Life Life Insurance While Alive

Depending on the policy type, you can use your life insurance policy while alive for major expenses like healthcare, debt repayment, or supplementing retirement income.

Permanent life insurance policies allow using the accumulated cash value.  Term policies, on the other hand, don’t accumulate cash value. The only way you can use your term coverage if you’re living would be through a living benefit rider that allows access to funds under specific conditions, like a serious qualifying illness.

1. Take a Partial Withdrawal from Your Cash Value

If you own a permanent policy, part of your premium builds cash value over time. Once enough has accumulated, you can withdraw from it to cover expenses such as a down payment, education costs, or as a supplement to retirement income.

Withdrawals are only possible after your policy has built sufficient value, usually over several years. They also reduce your death benefit, and any amount withdrawn beyond what you’ve paid in premiums may be taxable

2. Borrow Against Your Life Insurance Policy

A policy loan allows you to borrow funds against the accumulated cash value (on permanent policy types), typically up to 90%¹. You’ll pay interest, but repayment terms are flexible.

Be sure to make payments, because unpaid loan balances and interest reduce your death benefit. If the loan balance ever exceeds your cash value, your policy could lapse.

3. Surrender the Policy for Its Cash Value

You can also choose to cancel your permanent policy before it matures and receive its cash surrender value, which is your accumulated cash value minus surrender charges and outstanding loans.

Surrendering your policy can provide immediate cash, but it also ends your coverage and may create a tax liability if you receive more than you’ve paid in premiums. It’s best suited for those who no longer need the protection.

4. Use Cash Value to Pay Premiums

If you’re facing financial hardship, some policies allow you to use your accumulated cash value to pay premiums. This can keep your coverage active without out-of-pocket payments.

Just make sure the remaining cash value is enough to sustain your policy; if it drops too low, your coverage could lapse.

5. Pay for Medical or Long-Term Care Expenses

If your policy includes an accelerated death benefit rider, you may be able to access part of your death benefit while you’re alive if you’re diagnosed with a qualifying chronic, critical, or terminal illness. (Qualifying illnesses vary by insurer.) These riders are available on both term and permanent life policies.

Funds can help pay for long-term care, daily expenses, home assistance, medical treatment, or other end-of-life costs. Typically, you can access up to 75% of your death benefit while alive. But remember, any amount you use will lower what your beneficiaries receive later.

Pros and Cons of Using Life Insurance While Alive

Using life insurance while alive seems like a feasible option due to flexibility and immediate access for short-term financial relief, but it reduces the death benefit, may trigger taxes, and can even put your coverage at risk if not managed well. Here are some potential pros and cons that you should know before you make a decision:

Pros

• Liquidity: Cash value loan and withdrawal on your life insurance may provide flexible access to cash without credit checks or lengthy approval. In comparison to traditional loans, it also skips detailed documentation and offers flexible repayment.
• Emergency Fund: Life insurance early payouts can be helpful in covering emergency expenses, unexpected medical needs, or retirement income gaps. It can be a good fit for people with no secondary source of funds or income to cover such expenses.
• Access to Funds: Accessing funds through a life insurance policy, doesn't mean you compromise on the coverage. It offers short-term financial relief without immediately canceling your coverage.

Cons

• Reduced Death Benefit: The amount of funds you withdraw from the accumulated cash value or borrow a loan against may impact what your beneficiaries receive. Withdrawal or outstanding loan amount (and interest) is deducted from your policy’s death benefit.
• Policy Risk: Unpaid loans or interest can cause your policy to lapse, especially if the outstanding loan amount exceeds the remaining cash value.
• Tax Implication: Withdrawals are typically not taxable but only when the withdrawal amount is within the cost basis, meaning total premiums you’ve paid. Withdrawals or surrenders may create taxable income if gains exceed premiums paid.

Before making a decision, it's good to weigh the trade-offs. Factor in your existing savings, the dependency of your family members, and if the expense you intend to fund is worth compromising on coverage.

Read: How Long Does It Take For A Beneficiary To Receive Money

Should You Use Life Insurance While You’re Still Alive?

Whether it makes sense depends on your goals, financial situation, and how much you still rely on the death benefit. Using your policy while you’re alive can be useful, but it also reduces your long-term protection.

When It Might Make Sense

• You’ve built substantial cash value.
• You need funds for medical expenses or long-term care.
• You want to supplement retirement income.
• You own multiple life insurance policies.
• You need long-term care due to progressive conditions like Alzheimer's disease and more.

When To Leave Cash Value In Place

• Your beneficiaries still rely on your death benefit.
• Your policy is new and hasn’t built enough cash value.
• You’re using it as part of an estate plan.
• You’ve secondary savings and investments to fund short-term expenses

Before using the life insurance during the lifetime, review the fine print of your policy. It’s good to consult a financial advisor to understand how loans, withdrawals, or riders work and what impact they may have on your coverage and taxes.

Read: Why Did My Life Insurance Premium Go Up

Misconceptions About Using Life Insurance While Alive

Many policyholders believe that all policies work the same way, and every policy is accessible while alive. But it's not true; that’s why understanding different policy types and how loans, withdrawals, and riders work is important. Here we list some common misconceptions around using life insurance while alive to help you make an informed decision.

• Not all life insurance policies build cash value, only permanent policies do.
• Using your policy doesn’t automatically mean losing value; when used carefully, it can be a flexible financial tool.
• You don’t always owe taxes when you withdraw money. Taxes apply only if your withdrawal or surrender value exceeds your total premiums paid.
• Policy loans are not completely interest free, loan interest still accrues.
• Not all accelerated death benefit riders are not automatically added. Some come at a small cost that you may add to your policy, typically at the beginning.