Life insurance provides your loved ones with financial security in the event of your death, but you may be able to cash in on your policy while you're still alive. Whether you need a lump sum of money to pay for college or you need money for a down payment on a house, tapping into your life insurance policy can help you meet your financial goals.
Read on to learn how to utilize your life insurance coverage today. And if you're in the market for life insurance with living benefits, it's important to understand how it works. You can compare life insurance policies on Credible's online financial product marketplace.
1. Tap into your policy's living benefit riders
Some types of life insurance come with policy additions, referred to as "riders." These riders may offer living benefits that apply if you meet certain criteria. Here are a few examples of living benefit riders:
- You're diagnosed with a chronic, terminal, or critical illness – You may be able to withdraw up to 80% of your policy proceeds to cover health care expenses through illness riders.
- You need long-term care – Nursing homes, hospice care and end-of-life services are extremely costly. Long-term care riders can help you cover these expenses.
Not all life insurance policies come with these living benefits, and having coverage with policy additions like benefits riders can be more expensive. That's why it's important to compare plans as well as premiums before you commit to a policy. You can shop around for life insurance for free (and without a credit check) on Credible.
2. Take out a loan from the policy's cash value
A life insurance policy loan uses the cash value of your plan as collateral. Since you're borrowing money from yourself, life insurance loans:
- Don't require a credit check
- Have relatively low interest rates
- May offer flexible repayment terms
Plus, the loan isn't technically income, so it's tax-free.
Not all life insurance policies permit loans, so you'll have to get in touch with your insurance company to see if your policy permits them.
3. Make a withdrawal from the policy
In addition to borrowing from your life insurance policy in the form of a loan, you may be able to simply withdraw from your policy's cash value.
Withdrawing from your life insurance policy early comes with a few drawbacks compared to loans, though it will reduce the value of the death benefit. This leaves your loved ones with less money to cover funeral expenses and living costs when you die.
You also may have to pay taxes. If you withdraw more than the value of your policy, the IRS will treat that amount as income.
4. Surrender the policy to receive the accrued value
Surrendering your life insurance policy lets you withdraw the full cash value and cancels any future coverage. You'll receive the money you've paid toward the coverage plus interest. But you may have to pay surrender fees and federal income taxes on the amount, so you'll have to compare your options based on your policy and its cash value to see if this is worthwhile.
If you're considering buying life insurance, compare coverage options and surrender fees on Credible.
5. Sell your life insurance policy to a third party
Life settlement brokers buy life insurance policies for cash, but the total amount is typically significantly lower than the death benefit. Plus, the payout comes with income taxes and fees, making this a more expensive option compared to loans and withdrawals.
The biggest drawback, though, is that you won't have life insurance coverage. This leaves your beneficiaries without a payout when you die.
You can shop around for the right life insurance company for you on Credible.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at firstname.lastname@example.org and your question might be answered by Credible in our Money Expert column.