March 13, 2020

How to use your life insurance policy as cash while you're still alive

While securing your financial future is important, sometimes you find yourself in a situation where you need to leverage your life insurance policy to cover expenses, or to pay for assisted living or in-home care. Your life insurance policy may be an option to help cover those expenses in several ways.

Your options will vary depending on your specific situation.

Before you decide on the right path for you, review the advantages and disadvantages of selling and cashing out life insurance policies.

Option 1: Using the cash value of a life insurance policy?

The cash value of life insurance policies varies between types of insurance (more details). Your insurance company and specific insurance type will determine how your cash value grows, but the value will depend on a few different factors.

Your insurance policy’s cash value is based on:

  • How much you invest in addition to your monthly premium
  • The growth of your premiums and reinvestment over time
  • When you decide to use the cash value of your policy

Because your cash value increases over time, if you cash in after you’ve only had the policy for a couple of years, you won’t see the same benefit as if you’re a decade into your policy.

Option 2: Taking a loan out on the policy's cash value

Depending on the type of insurance and the amount of accumulated cash value in your policy, you may be able to take a loan out using the cash value as collateral. This type of loan may have better interest rates than other personal loans, but it's not always true, so you'll need to shop around a bit to find the right loan based on your individual needs. But keep in mind, failure to repay the loan before you pass away will likely mean that the remaining money and fees will be deducted from the policy's death benefit. In addition, you won't be able to use the cash value of the policy.

Option 3: Selling your life insurance policy

Selling your life insurance policy is an option, but it’s quite a bit different than cashing in a policy. First, if you cash out a policy, you still have death benefits in most cases. However, once you sell your life insurance policy, that’s it.

The value of selling your life insurance policy is based on a few things, like:

  • Your monthly premium payment
  • Your life expectancy when you sell the policy
  • Your beneficiaries’ death benefit

You may have seen ads on television regarding selling your policy for a "life settlement." The first step to understanding whether this is an option for you is to get the policy appraised.

When should you cash out or sell a life insurance policy?

The decision to sell or cash out an insurance policy is a big one — in one case, you lose death benefits for your loved ones and, in the other case, you have the potential to seriously impact your death benefits.

There are three things you should consider when deciding to use your life insurance as a a way to access extra cash before you die: :

  • Future premium payments: The cash value of your policy may be used to pay the premium payments in the future; if you use it now, your premiums will likely go up later.
  • Potential liabilities: If you need cash now and are willing to receive significantly less (or none) than your death benefit, selling might be a better option for you.
  • Current income situation: If you have high monthly payments, you can either use your cash value to cover them or get out of them by selling or surrendering the policy.

The right option for you will depend on whether you need to keep your death benefits or you’re comfortable losing them because the life situation you insured when you bought the policy has changed, requiring less insurance.

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