How to Use Life Insurance While Alive?

How can I benefit from my policy for daily living? Every permanent insurance policyholder wanted to know the answer to this question.

The short answer is: You can cash it out!

But if you want a comprehensive explanation of how to cash out your permanent life insurance policy and enjoy many benefits while still living, keep reading this article!

There’s even more! We will show you the most advantageous method of cashing out and how you can do it yourself.

Interesting, right? Let’s find out!

Cashing Out a Life Insurance Policy

Cashing out a life insurance policy is a way to get the money that has built up in the policy before you die. To do so, you must have one of the three types of permanent life insurance policies: whole, universal, or variable.

Permanent policies build a cash value that gives you access to the cash portion of your account for lifetime coverage. This option may be a backup cash resource in unexpected life circumstances.

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Imagine that at some point in your life, you suddenly find yourself in a tough financial situation and have to struggle to get enough money to pay your bills and live the way you want. Or, you could get sick and need constant medical care and a second way to make money. 

You can breathe a sigh of relief! Cashing out a life insurance policy is one way to get the money you need and solve your current money problems.

Four Ways of Cashing Out a Life Insurance Policy While Alive

There are four ways of cashing out a life insurance policy:

  1. Taking loans against the policy’s cash value;
  2. Withdrawing money from the policy;
  3. Surrendering the policy;
  4. Cashing out a life insurance policy through living benefits.

Take a Loan Against the Policy’s Cash Value

You can take a loan from the accumulated cash value for any reason. That money actually comes from the insurer, so that’s why these life insurance loans also include interest payments.

Still, they have relatively low interest rates compared to traditional loans (like home equity loans). But there are significant differences between policy and bank loans:

  • You don’t have to wait for approval to get a loan. So, getting policy loans is quick and straightforward.
  • Policy loans are without high fees and costs.
  • You are in complete control of monthly payments – you set the date, amount, and interest. Moreover, you even can choose not to repay the loan. Even if you choose this option, the loan accrues interest that is added to the balance of the loan.
  • Unlike regular loans, policy loans are not considered taxable income. The only condition you have to meet is to borrow money that is equal to or less than the amount of paid policy premiums. 
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Withdraw Money 

Most of the time, you don’t have to pay income taxes on the money you withdraw from a permanent policy. There is the same condition as with taking a policy loan: the amount you want to withdraw must be less than what you’ve paid into the policy.

But here is the catch. Since it’s not a loan and you cannot pay it back, the death benefit will be reduced. We can’t talk generally about how much of the death benefit will be reduced because it depends on your cash value account, specific terms, and your insurance company.

Still, we have to warn you: sometimes the reduction is greater than the withdrawn money.

If you want to withdraw the money anyway, the best way is to meet your life insurance agent and discuss these sanctions.

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Surrender the Policy

Another way an insured person can cash out their policy is by selling their policy through a life settlement. With life settlements, it’s possible to sell a current life insurance policy to a third-party investor in exchange for cash. 

Let’s face the most important thing first: if you surrender a life insurance policy, it means you’ll cancel it. You are giving up your future coverage, and that releases all the cash value.

If you decide to go with this method, you will receive money that has already been applied toward the policy and associated interest. The biggest flaws of this approach are mandatory surrender fees and federal income taxes.

Believe it or not, even this method has its benefits. Since you’re basically selling your policy, you can get paid either in single or periodic payments.

The secondary market is the most common place to sell life insurance policies. It’s possible to even receive a payout that is more than the cash value. However, it’s not that frequent.

In fact, it’s more likely to have a lower payout than the full value of the policy. Moreover, there is another drawback.

Some insurers will charge you a penalty for cashing out the policy too soon. If you’re confident that this is the optimal way for you to use life insurance, you can consult an insurance professional for further details.

To be honest, this is the most inadequate way to cash out your policy. Who wants to give up all the hard work they put into funding the policy if they don’t have to?

Surrendering the policy is an acceptable option only if you don’t have any other.

Cash Out a Policy Through Living Benefits

Living benefits, or accelerated death benefits, are another way to take advantage of cashing out your life insurance while you’re still alive. It allows policyholders to access death benefits while they are alive. To do that, you’ll have to meet certain criteria.

  1. Have a chronic illness – If you have cardiovascular problems, high blood pressure, or asthma, you know that your health condition can deteriorate. In these cases, you will need constant medical care. To keep these chronic illnesses from draining you financially, you can cash out your life policy by using the living benefit.
  2. Have a terminal illness – If you’re terminally ill with a life expectancy of fewer than 12 months, such as neurological disease, heart disease, or advanced cancer, you can apply for a living benefit and cash out a life insurance policy.

Depending on the specific situation, the payout can range from 25% to 100% of the policy’s death benefit. Also, an insured person can sometimes choose whether to get a lump sum or payments over time.

How to get riders? It depends on your insurance company. Some riders can be bought for an additional cost, while others are already included in the policy.

Types of Accelerated Benefit Riders

There are three types of living benefit riders:

  • Critical illness riders pay out the main part of the death benefit to insured persons when they are diagnosed with a major disease or suffer serious injuries. In this case, the death benefit is usually received as a lump-sum payment.
  • Chronic illness riders pay out a periodic benefit to the policyholders if they become disabled or incapacitated. This rider becomes active when the policyholder is unable to perform at least two out of the six basic activities like eating, dressing, bathing, transferring, toileting, and continence.
  • Long-term care riders usually require separate full underwriting for the policyholder, but provide overall coverage for long-term or nursing home expenses. It is more comprehensive than chronic illness benefits, but also more expensive.

Key Takeaways

Here are some quick bites from today’s article:

  • It’s possible to use the policy for something else than life insurance coverage. You can do it by cashing out your policy.
  • You can cash out a policy only if you have one of the permanent policies: whole, variable, or universal life insurance.
  • Term policies don’t have a cash value component and therefore can’t be cashed out.
  • There are four different methods you can do to use the cash value: you can take a loan, withdraw money, surrender, or activate living benefits.

Should You Cash Out a Life Policy?

Buying life insurance coverage traditionally means providing your beneficiaries with a death benefit. But that doesn’t mean we can’t utilize our policy in different ways and enjoy life insurance benefits while still living.

Cashing out your policy is a great way to find money in emergency situations. Consider how incredible it will be to be able to use your cash value in situations other than emergencies.

Stop dreaming about it! It’s possible, and it’s so easy.

So the answer is: yes, you should cash out your policy. But you have to do it in a way that works for you and can help you make more money.

Here is how you can do it:

Firstly, you will need a whole life insurance policy. As we mentioned, it is a type of permanent life insurance and has a cash value. We use our whole life as a vehicle for storing our money.

Why would we do that when there is a bank account for the same thing?

Well, the difference is when you need to access money. For the rest of your life, you can use the money whenever you need it. The best part? You will still be able to earn a guaranteed rate of return.

Cash value allows you to take loans against it. Taking and repaying loans are the essential processes of infinite banking.

Infinite Banking

It is a personal finance strategy that leverages a whole life policy as a personal bank. Just like regular banks, this process includes taking loans against the policy and growing cash flow.

To start infinite banking, you need to work with an experienced broker who has access to a wide range of policies and can set the best conditions for your needs. They will develop a financial plan that is designed for infinite banking and help you set your policy.

Once everything is set, you can borrow money from your cash value policy and fund anything you need—big purchases, investment opportunities, or else.

The biggest difference between taking a loan from a bank and using your policy is that your cash value continues to grow even when you take a loan. And with whole life policy loans, you have flexible repayment terms, which puts you in control.

With whole life and infinite banking, you provide liquidity, earn stable returns, and have a safe space to keep your money.

Also, you will become financially independent because you will have your own bank instead of using traditional banks.