How to Cash in Life Insurance While Still Alive

Most people think of life insurance as something that benefits their family, not necessarily themselves. But, there are ways to use your policy during your life, including the ability to cash in your life insurance while still alive if a financial need arises.

This guide will cover your options for cashing in your life insurance. (Cashing out means the same thing.) It also covers options to get the most money out of your policy both now and in the long term.

Ways to Cash in Life Insurance While Still Alive

The good news is that you have lots of options! Assuming you have a permanent life insurance policy (whole life, indexed universal life, etc.) that accumulates cash value, there are several avenues to get cash from your policy – some of which even let you keep the policy in force. 

Use Living Benefits 

Living benefits allow you to use part of your death benefit in specific scenarios, typically a pre-defined chronic, critical, or terminal illness. You can use this money while living to pay for experimental medical treatment, nursing home care, or any other needs that may arise.

• Chronic Illness – The policy owner can use a portion of the death benefit if they can no longer perform two or more of the six activities of daily living, such as eating, dressing, or bathing
• Critical Illness – Gives the policy owner a percentage of the death benefit upon diagnosis of specific illnesses, such as most types of cancer
• Terminal Illness – Allows the policy owner to use some of the death benefit upon diagnosis of 12-24 month remaining life expectancy

Each life insurance company has slightly different definitions, so your policy may differ from the above general terms.

Pay Premiums with Cash Value 

If you find yourself in a tight spot, you can cover your life insurance premiums for a while with the cash value you’ve built up over time. It’s one way to keep your life insurance coverage in force if that makes financial sense. For example, if you or your spouse just lost a job and need to whittle down the monthly expenses for a while, this is one way to cover current financial needs without sacrificing the policy.

Long-Term Care Riders 

The most recent numbers from the Department of Health and Human Services show that 70% of adults age 65 and older will need long-term care at some point over the rest of their lives. On average, people will need about three years of care, but 20% will need more than five years.

If you’re ready for a heart attack, do a quick search for the cost of long-term care in your area. Since Medicare doesn’t pay for it, more people are looking to insure against that particular expensive risk. Sometimes, this is through standalone long-term care insurance policies. However, adding a rider to a life insurance policy is an increasingly common way to cover the expense of long-term care without spending down an entire retirement savings.

A long-term care rider allows you to cash in some of your life insurance benefits for home care, nursing home stays, or other services outlined in the contract. That can free up income for more fun things.

Policy Loans – AKA Tax-Free Income Streams 

One of our favorite retirement planning strategies (which you can read more about here) is to set up life insurance to maximize its accumulated cash value. As the cash value builds over the years without losing money, you can draw from it to use it however you like. For example, I used my own cash value to buy the family car rather than a vehicle loan.

As long as it’s a policy loan, you never need to pay it back — although it will detract from your death benefit. And because it’s a loan, the IRS does not count it as taxable income. You can, of course, pay it back if you wish, giving yourself more cash to tap into later.

Surrendering Life Insurance for Cash 

You can surrender the policy for the cash surrender value if you no longer need or want your life insurance. You will receive a lump sum, and the policy will end.

This option does have some tax implications, so make sure to consider those when running the numbers.

Selling Your Life Insurance Policy

You can sell your policy instead of surrendering it for the cash surrender value. In many cases, this will net you more money than surrendering it.

You’ll often see this called a life settlement. An investor buys the policy from you and takes over premium payments. They will collect the death benefit when you eventually pass away.

You’ll often get more than the cash value of the policy with a life settlement but less than the death benefit.

There are some qualifications to sell your policy, which include:

• Age 65 or older
• Poor or failing health
• Death benefit of $100,000 or more.

If you meet these qualifications, fill in the form below to get a free valuation on your policy.

Benefits of Cashing In on Life Insurance While Still Alive 

The two big downsides to cashing in your life insurance are taxes and the fact that you no longer have life insurance. But we wanted to highlight some reasons people have sold their permanent life insurance policies rather than liquidate other, potentially income-producing, assets.

Accessing Funds for Unexpected Medical Expenses

Both the living benefits and long-term care riders allow you to access funds for surprise medical expenses. If you have these on your policy, you won’t need to surrender or sell it, leaving the policy in force for the financial security of your family.

Supplementing Retirement Income

This is one of our favorite strategies for using life insurance during your lifetime. Policy loans aren’t taxed, so if you plan ahead and get a cash value focused policy that’s properly designed for this purpose, you can easily create a retirement income stream that’s not subject to income taxes.

It also allows you to take life insurance loans from the cash value component at any time before you retire if you have other expenses that would otherwise require asset liquidation.

Paying Off High-Interest Debts

Tapping into your life insurance cash value to pay off debts like credit cards or personal loans can help get you out of debt faster. There is no sense in paying that horrific 27+% interest charge on a credit card or personal loan if other options exist.

Funding a Child’s Education

Starting a 529 for your kid when they’re young can give them a great head start on paying for college. However, FAFSA asks about 529s. It doesn’t ask about the cash value in your life insurance policy. This means you can use part of your life insurance to help alleviate some of your child’s increasingly painful student loans.

Taking Advantage of Investment Options

We’ve talked a lot so far about using your cash value or even selling your policy as part of an emergency fund. But what about opportunities that come your way? We’ve had people tap their life insurance for opportunities like buying a home or investing in income-producing real estate.

Considerations Before Cashing Out Your Life Insurance 

There are a lot of benefits to taking advantage of the cash value of your life insurance, especially if you find yourself in a financial pickle. However, there are also some downsides to consider in order to make the best-informed decision possible.

Surrender Fees & Penalties

Most policies charge surrender charges for ten years. This fee typically starts at around 10% and drops 1% annually until it reaches zero. However, since life insurance companies have wildly different fees, definitely check your contract.

Impact on Death Benefits

Surrendering or selling your life insurance means your family won’t see any of the policy’s death benefit. Using some of the living benefits, withdrawing cash, or taking policy loans will reduce the amount going to your beneficiary.

Tax Implications of Cashing In On The Policy

If your cash surrender value exceeds the premiums you’ve paid over the policy’s life, you’ll owe taxes. The amount will depend on your tax bracket for the year you surrender your life insurance.

Steps to Cash In Life Insurance While Still Alive

1. Review your policy. Knowing if you have riders that can cover your options and how those riders work can be a better financial advantage than surrendering the policy. Read through your contract, or if you think that’s boring, talk to your insurance agent, who can explain it without all of the legalese.

2. Consult a professional. Talking with your accountant, tax advisor, or financial advisor before taking irreversible action will help prevent any unexpected financial implications.

3. Consider your financial goals. Do you have a long-term financial strategy? (It’s okay if not; most people don’t. But it might be time to start on one.) Which steps you’re considering with your life insurance get you closest to your goals for your financial future?

4. Impact on beneficiaries. If you were to pass away after taking action on your life insurance, would your children still be able to eat? Would your spouse still have a roof to sleep under? Only you and your family can determine the acceptable level of risk.

5. Contact your agent or sell your policy through a life settlement broker. Once you have a plan with all of the financial implications laid out, work with your agent to use the living benefits on your policy.

Should You Sell Your Life Insurance Policy?

Cashing in on your life insurance can be an advantageous financial decision for you and your family if you’ve taken the time to think through all of your options. As long as the benefits are over $100,000 on a permanent policy (whole life insurance or universal life policies) or a term policy, you may qualify. There are a few more steps to selling a term life insurance policy.

Selling your life insurance may be a viable option if you no longer need the coverage. At Abrams Insurance Solutions, we’ve helped families sell policies they no longer needed or didn’t want to maintain. Other families realized that the policy they purchased when first starting their married life no longer matched their financial goals and wanted to switch to a cash value focused product.

If you have any questions about selling your policy, fill out the form on this page or call us at (858) 703-6178.