It may seem as though life insurance is a necessary evil. Many of [my clients] don't even consider their life insurance to be an asset, according to Kimberly Dula, partner at the accounting firm Friedman LLP in New York City. She claims that instead, many view it as a recurring expense from which they will never personally gain.
Some experts claim that the perspective on life insurance is incorrect. Ray Caucci, senior vice president for product management, underwriting, and developed markets at Penn Mutual Life Insurance Company, asserts that the policy "has many more uses than merely a death benefit."
These three methods will enable you to obtain the life insurance policy's value while you are still alive.
1. Use its financial value
Term life and permanent life are the two most common types of life insurance. The less expensive choice, term life insurance, will provide a death benefit if the policyholder passes away while the plan is still in effect. Permanent life insurance is more expensive, but because it includes an investing component, plans can accrue monetary value over time.
The high fees on life insurance policies have given the sector a poor name, according to Craig Simms, senior vice president of sales and marketing at Vantis Life Insurance Company. However, permanent life insurance might still be a desirable option for people who want to be sure they always have access to coverage. Additionally, because of its cash value, policyholders have a ready supply of cash that can be used for any purpose.
Loans: While each firm may have different policies, most companies let customers borrow money from the accrued cash value for any purpose. These loans have no established payback plan, but they will accrue interest charges that may lower the death benefit.
Withdrawals: Policyholders don't have to worry about paying interest when taking money out of the cash value. A withdrawal, however, may alter the cost of the insurance and may have an impact on the death benefit.
Relinquish: To relinquish a policy is to revoke it. The policyholder now receives the full cash value. Before doing this, a person should confirm that they don't require the coverage or can find coverage elsewhere.
Caucci claims that when choosing between a loan and a withdrawal, policyholders have more possibilities with a loan. They have the opportunity to make payments that will keep the death benefit and reinstate the cash value if they choose not to pay back the loan. "It's much tougher to restore the values back to where they were if you take a withdrawal," he claims.
2. Submit a living benefit application
Another option to access the value of a life insurance policy while a person is still alive is through living benefits. If certain conditions are met, these benefits typically permit a portion of the death benefit - normally up to 50% - to be paid in advance. Simms explains, "We don't want to eliminate the [death] benefits entirely." That is the reason it is capped at a percentage.
The following versions of these accelerated advantages are most frequently available:
Benefits of chronic illness: Needing assistance with at least two out of six daily life activities, such as eating, dressing, or bathing, is a common definition of a chronic illness.
Benefits for terminal illnesses: People with a life expectancy of less than 12 months who have been diagnosed as terminally ill by a doctor may also be eligible for living benefits.
Benefits for long-term care: Additional fees may be required to access long-term care benefits. Although they are a little more expensive, these offer excellent coverage potential, according to Caucci. This is due to the possibility of long-term care riders including payouts beyond the policy's death benefit.
Some plans may include these advantages as essential features, while others may only provide them as add-ons. Although most individuals are aware of the cash worth of plans, Simms contends that "the industry needs to do a better job of educating the public on these possibilities."
3. Sell the insurance
Life settlements provide a final choice for those who need to receive funds from their life insurance policy before passing away. Dula explains, "In essence, what's occurring is that you're selling your coverage."
A lump sum payment or an annuity with recurring payments may be offered as part of the settlement. Typically, investors buy insurance policies on the secondary market for a sum greater than the cash value but considerably less than the full value of the policy. The beneficiary of the death benefits is the new owner, who also assumes responsibility for premium payments.
Although it may only be an option for those who are older or have a particular amount of death benefit, a life settlement can be preferable to letting a policy lapse. It is best to work with a seasoned broker for the best payment. Make sure you're working with an insurance company you like, trust, and know, advises Dula.
While providing a death benefit to support heirs or leave a lasting legacy is the primary goal of life insurance, you can still benefit from these plans while you're still living. If you require money immediately, think about choosing one of these three possibilities.