5 ways to use your life insurance while you’re still alive

By Tory Crowley, Policygenius.com editor and former licensed life insurance agent

The primary benefits of life insurance are redeemed after you die. This is when the insurance company issues the death benefit payout to your beneficiary in accordance with the terms outlined in your life insurance policy. However, many life insurance policies also offer ways to benefit from the policy while you are still living. 

The main options to use your life insurance policy to your advantage while you’re still alive include applying for living benefits, taking out a loan, withdrawing cash from your policy, and surrendering or selling the policy. If you are considering leveraging one of these options, it’s important to carefully weigh the pros and cons of each action before making a decision. 

Can you use your life insurance policy while still alive?

The most popular ways to take advantage of your life insurance policy while you’re still living include: 

• Claiming living benefits on your policy. Living benefits are coverage add-ons that allow you to use part of your death benefit before you die under special circumstances; for example, if you’re diagnosed with a critical illness

• Utilizing the cash value on your permanent life policy. Cash value is the portion of your policy that works like a tax-deferred savings account and earns interest over time, and it’s exclusive of permanent life insurance policies. 

If you don’t have any living benefits or cash value on your policy, you won’t be able to benefit from your life insurance policy unless you die. While there are ways to benefit from your policy while you’re still living, keep in mind that the primary reason people get life insurance is to leave money to your beneficiaries after you die. 

What types of life insurance can you use while alive?

Only permanent life insurance policies include a cash value that you can access while you’re still living. But all types of insurance policies — including term life insurance — will have the option to include living benefits. 

When you get a life insurance policy, make sure you understand what, if any, qualifying events will allow you to claim living benefits — for example, any specific critical or terminal illnesses you may be diagnosed with.

If you have a permanent policy that accumulates cash value, it’s important to understand how the cash value will grow and the terms in which you can access those funds. 

1. Apply for living benefits

Living benefits allow you to claim part of your life insurance policy’s death benefit while you’re still living. Living benefits usually come in the form of riders, or add-ons to the policy. If your policy does have living benefits, the terms will be outlined in your initial life insurance application. 

How it works

If you meet the qualifying criteria to claim a living benefit, you’ll submit your claim to your insurance company and once approved, they’ll send you a tax-free sum, subtracted from your insurance policy’s total benefit. 

Pros

In most cases, adding a living benefit comes at no additional cost. It’s a feature built into many life insurance policies to allow you to use the death benefit in the way that is most advantageous to you. Once you redeem the benefit, you can use the money however you wish. You don’t need to prove that the money is being used for medical bills or funeral costs. 

Cons 

Living benefits are not offered by every insurance company, so if having living benefits is important to you, it could limit your options for coverage. When you have the option to add living benefits for an extra cost, it can be expensive. Additionally, if you do exercise your living benefits, it will take away from the total death benefit that you leave your beneficiaries. 

2. Take out a loan from your policy’s cash value

If you have a permanent policy that accumulates cash value, there are several ways you can use those funds while you’re still living, including taking out a loan.

How it works

You’ll be able to borrow the amount of the cash value associated with your policy. If you die before you pay back the loan, the amount you owe (plus interest) will be deducted from the death benefit before it’s sent to your beneficiary. 

Pros

Taking out a loan against your life insurance policy is a great option for people who need a personal loan and may have trouble getting approved with a competitive interest rate. Because the policy serves as your collateral, you’re essentially taking out a loan against yourself and the insurance company has no risk in giving you a loan. 

Cons 

Taking out a loan on your permanent life insurance policy is more complicated than setting up a term life insurance policy and taking out a personal loan separately. While it is nice to have the option of taking out a loan on your policy, the loan itself is not a good reason to take out a permanent life insurance policy. Additionally, if you are unable to pay back the loan beyond the grace period, your life insurance coverage will lapse. 

3. Withdraw cash from your policy

If you have a permanent life insurance policy, you may be able to withdraw cash from the policy’s cash value. Depending on the type of policy you have and how its cash value grows, it can take several years before there’s enough money on your cash value account to withdraw from.

How it works

Once a cash value has accumulated on your life insurance policy, you’ll have the option to withdraw money from that accumulated cash value. You can’t withdraw more money than what has accumulated. 

Pros

If you need money, withdrawing from the cash value of your policy is a great way to get money without going into debt. You’re essentially taking money from yourself to use however you need. 

Cons 

If you do withdraw money from your insurance policy’s cash value, you will likely have to pay surrender fees for accessing the money. You will also forfeit any growth that the cash value would be expected to accumulate over the course of your life. And ultimately, you will leave less money to your beneficiary after you die. 

4. Surrender your policy

Canceling a permanent life insurance that has cash value — for example, a whole life or universal life insurance policy — is called surrendering your policy. Any cash value that has accumulated on the policy when you surrender will be available to you. 

How it works

If you give up or surrender your permanent life insurance policy, you’ll lose your coverage, but you’ll receive any cash value your policy has accumulated, minus any fees or penalties associated with the transaction. 

Pros

If you no longer need your life insurance policy or can no longer afford your premium payments, surrendering your life insurance policy is a straightforward way to end your insurance coverage and preserve the cash that has accumulated on your policy. 

Cons 

Surrendering your policy means that you lose your life insurance coverage. Another disadvantage to surrendering your policy is that even though you get to access the cash value of your policy, you’ll pay surrender fees — which can be from 10% to 40% of the value — and taxes if the total cash value is greater than the premiums you paid into the policy. 

5. Sell your policy to a third-party 

You can also sell your life insurance policy to a third party through a process that is known as a life settlement.

How it works

If you choose to pursue a life settlement, the third party that buys your policy from you will own your policy and make the payments.. You will no longer be entitled to the death benefit, but you will be able to claim the cash value once you complete the transaction

Pros

If you find a buyer, selling your policy will get you more cash than surrendering your policy. You will also get to keep the cash value you’ve accumulated and you will no longer have to pay the premiums, because the buyer will take over that responsibility. 

Cons 

Selling a permanent life insurance policy can be challenging because it is usually very hard to find a buyer who is willing to purchase ownership of your policy at a competitive price. And once you do find a buyer, the transaction will still be subject to fees and taxes.
 

You can also sell a term life insurance policy, but the costs associated with the transaction would essentially cancel any profit you would make.

Should you use your life insurance policy while you’re still alive?

It is not recommended that you use your life insurance policy while you are still alive. In most cases, paying extra for living benefits or a type of life insurance that accumulates a cash value is not worth any additional cost. Many living benefits are included in insurance policies without having to pay additional premiums. 

Keep in mind that the primary benefit of a life insurance policy is meant to be used after you die, when the funds go to your beneficiary. While it can bring peace of mind to have the option to use your life insurance policy while you are still living, it is usually not worth the cost. 

Generally speaking, living benefits that come at no additional cost are worth pursuing when you apply for life insurance, but other means of using your life insurance policy while you are still alive are usually not worth the cost.