Most people see life insurance as only a safety net for their loved ones after they die. Many policyholders fail to realize that circumstances exist where they can access their life insurance benefits before their death. Below, we’ll explore the details surrounding the question, “Can I use my life insurance before I die?” and give insight into how, why, and when you can tap into your life insurance benefits while still alive.

Introduction to Using Life Insurance Benefits Early

Using your life insurance benefits while still alive may seem counterintuitive, but it remains a possibility and may be beneficial for many policyholders. Various situations, such as financial strain, critical illness, or unexpected expenses, could lead you to consider this living benefits option. Knowing the different avenues to access these funds early can help you make an informed financial decision on whether or not tapping into your life insurance policy early is a wise option.

A life insurance policy’s primary function is to provide your beneficiaries financial security if you die. However, modern life insurance products have living benefits that allow you to access policy benefits in ways that can help during your lifetime.

A policy loan is a common life insurance policy living benefit. Many whole-life and universal life insurance policies build a cash value over time, and you can borrow against this value. A policy loan can be helpful if you run into financial hardship, as you get immediate access to funds without a traditional loan’s credit check or lengthy approval process.

However, you must remember that if you take out a policy loan, the insurer will deduct any outstanding loan amount and interest from the death benefit. This means that if you die without fully repaying the loan, your beneficiaries will have less financial support.

Another way to access life insurance benefits early is the accelerated death benefit, which allows you to receive a portion of the policy’s death benefit while still alive if you’re diagnosed with terminal illnesses. This upfront cash often helps cover medical expenses or hospice care, but you can also use the money to fulfill lifelong dreams or experiences.

Types of Life Insurance Policies that Allow Early Access

You have several life insurance policy options with living benefits. The primary types are:

• Whole life insurance: These permanent life insurance policies can build cash value that grows as you make premium payments. You can borrow against this cash value and repay it or withdraw funds directly from it.
• Universal life insurance: Like a whole life policy, these permanent life insurance policies also accumulate cash value. The big difference is a universal life (UL) policy offers flexible premium payments and death benefits.
• Term life insurance: Traditional term life insurance policies don’t have a cash value option. However, a term life insurance policy may offer a living benefits rider that gives you early access to the death benefit if you’re diagnosed with a qualifying illness.

Ways to Use Life Insurance Benefits Before Death

You can access the cash in your life insurance coverage while alive in several ways. Some of the common ways to access these funds are:

• Cash value withdrawals: A whole or universal life insurance policy may allow you to withdraw some of its accumulated cash value as needed. However, you must remember that any withdrawals will likely reduce the death benefits your beneficiaries receive if you die.
• Policy loans: If you only need a temporary influx of cash, you can borrow money against your life insurance policy’s cash value. This option is advantageous because you’re borrowing from yourself.
• Accelerated death benefit payments: Certain life insurance policy riders will release death benefits before death when you have serious health issues. You can use these funds in any way you see fit, but many use them to ease the financial burden of end-of-life medical expenses or to provide much-needed cash for living expenses.
• Critical illness and chronic illness riders: If you develop a critical or chronic illness that meets the insurer’s requirements, you can tap into some or all of your life insurance death benefit before you die. Chronic and critical illness life insurance riders can help pay medical expenses and cover living expenses while you’re still alive.
• Long-term care riders: If you develop the need for long-term care due to an illness or injury while insured, this living benefit rider allows you to use some or the entire death benefit to pay for this care.

Understanding the living benefits of life insurance policies can help you decide which life insurance option is best for you. Though using living benefits isn’t ideal because they reduce the death benefit, they can come in handy if a financial crisis strikes or you need cash for medical expenses.

Pros and Cons of Using Life Insurance Benefits Early

Every financial decision you make will come with pros and cons. The same goes for accessing life insurance early benefits early. Let’s review the pros and cons of life insurance loans and other early access options.

Pros

Early life insurance benefits can step in and fill financial gaps if you run into a rough patch, encounter unexpected medical expenses, and more. Some of the benefits of these programs are:

• Access to funds when facing financial issues, medical bills, or other significant life changes.
• Financial flexibility, so you manage current obligations without jeopardizing your future economic health.
• Peace of mind knowing you have options if finances get tight.
• Ability to invest the funds in areas that can yield higher returns. Some areas you can invest in include funding a child’s education, starting a new business, or even investing in real estate.

Cons

Though the advantages seem worthwhile in many cases, you also want to understand the potential downsides of accessing early benefits. These potential downsides include:

• Reduction of the death benefit for your beneficiaries.
• Owing taxes on any withdrawals or loans from the policy.
• Forfeiting coverage if the policy lapses due to unpaid loans or withdrawals exceeding the cash value.
• Feeling emotionally down because you resorted to taking out a loan against your insurance policy.

You should always analyze your circumstances fully and speak with a licensed insurance agent and financial advisor before accessing your life insurance benefits early. While it may help get you through a momentary rough patch, the long-term financial impact could far outweigh the short-term benefit. These professionals can help you see the overall picture more clearly.

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Tax Implications of Early Life Insurance Benefits

When you access life insurance benefits before death you may trigger tax consequences. You want to fully understand the tax implications of life insurance withdrawals before pulling the trigger on one so you’re fully prepared and informed.

Typically, you can withdraw up to the total amount of the premiums you paid into the policy and not owe income taxes on life insurance cash value on it. This is because the IRS considers that a return of policy premiums instead of income.

However, if your policy has made gains, such as paying dividends or having accumulated interest, you may owe income tax on the gains you withdrew.

Fortunately, the IRS doesn’t consider a life insurance policy’s cash value and gains income. So, as long as you don’t withdraw cash, you will owe no taxes on the cash value or any gains. That said, it’s always best to consult with a tax professional to verify you’re up to date on all the tax rules and potential implications of using your life insurance benefits before death.

Tax Implications of Surrendering an Insurance Policy

You also must consider tax implications when you choose to surrender your policy. Whole life and universal life policies accumulate cash value you can access. The cash value, like some retirement benefits, grows tax-deferred, meaning the IRS doesn’t consider the growth as immediately taxable income unless you withdraw it.

However, if you surrender the life insurance policy and collect the cash value, you may have to pay taxes on the cash you collect. This is especially true if the amount of cash you receive exceeds the premiums you paid.

For example, imagine you’ve paid $20,000 in life insurance premiums and, thanks to dividends and other gains, the cash value reaches $30,000 when you surrender the policy. Of the $30,000 lump sum payment you receive at the time of surrender, the $20,000 in premiums you paid in is not taxable, but the $10,000 in gains is taxable as income.

Now, not every early withdrawal is subject to taxes, even if you withdraw gains. For example, if you have a terminal illness rider that allows you to access an early death benefit, the payout is typically tax-free.

Keep in mind that tax laws change frequently, so review the most current tax implications of life insurance withdrawals and speak with a tax expert before taking a withdrawal.

How to Decide if Using Your Life Insurance Early is Right for You

When asking yourself “Should I use my life insurance early,” you want to consider all the potential benefits and drawbacks and how they can impact your life and your beneficiaries’ lives. Some questions to ask yourself include:

• What are my current financial needs? Reviewing your current financial needs and how to meet them is one of the most important steps. If you can find alternative ways to make ends meet without accessing early life insurance payouts, you should try those paths first.
• How will this decision affect my beneficiaries? Another critical factor is how a withdrawal will impact the beneficiaries. If you take too large of a withdrawal, it could leave them with little to no benefits to make ends meet after your death.
• Do I fully understand the terms and penalties? Each insurer has different terms and conditions for its loans and withdrawals. Make sure you fully review these terms and understand any fees and penalties associated with them, so you don’t run into surprises.
• Am I exhausting all other financial options? Tapping into your life insurance early should be a last resort, as it can impact your beneficiaries’ financial future. So, make sure you’ve exhausted every other financial option, such as a personal loans or home equity loans, before opting to withdraw or take a loan against your cash value.

While asking yourself these key questions is an important part of your life insurance cash-out decision, you still want to consult with a professional before making this decision.

Frequently Asked Questions (FAQs)

Can I Borrow from My Life Insurance Policy?

Most life insurance companies’ whole life and universal life policies accumulate cash value as you pay your premiums. Once this cash value reaches a certain threshold, you can borrow against the cash value or withdraw it.

What Is an Accelerated Death Benefit?

This is when you’ve received a terminal illness diagnosis from a doctor, and your insurance company pays out some or all of the death benefit before you die. This gives you the finances you may need to pay for medical expenses, palliative care, and more.

Are There Penalties for Using Life Insurance Cash Value?

There are generally no direct penalties for using cash value, but you want to consider the tax implications when withdrawing money from your policy early.

Conclusion: Making the Most of Your Life Insurance

Most people consider life insurance as a safety net only for their beneficiaries, but many life insurance policies offer cash benefits for the policyholder before they die. Benefits like terminal illness rider payouts, early death benefits, and cash value loans and withdrawals give you access to your whole life or universal life policy’s cash value or death benefit before you die.

Speak with a licensed insurance agent about all riders and other options available with a policy when considering one. Understanding all the policy options and riders can help you figure out which policy type is best for you. Fidelity Life can help you find the perfect life insurance policy to support your peace of mind. Check out our options today.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible. We encourage you to speak with your insurance representative if you have additional questions and make sure you read your policy contract to fully understand your coverage.https://fidelitylife.com/life-insurance/