Life insurance is often thought of as something that only pays out after you pass away and a financial safety net for your loved ones. But if you have the right type of policy, life insurance can also serve as a flexible financial tool while you’re still living. Especially with permanent policies that accumulate a cash component, modern life insurance can do more than just provide a payout to beneficiaries. It can support your financial goals today.
Below, we explore smart ways to use your life insurance while alive and how to make these tools part of a thoughtful financial plan.
- Access Cash Value Through Loans or Withdrawals
Permanent life insurance policies such as whole life, universal life, or indexed universal life, build cash value over time as you pay premiums. This cash value is separate from the death benefit and grows tax-deferred, functioning somewhat like a savings account within your policy.
Policy Loans
One of the most flexible ways to use that cash value is by taking a policy loan. Unlike traditional bank loans, loans from your life insurance are borrowed against your own policy’s cash value, usually at relatively low interest rates.
- No credit checks are required.
- Flexible repayment terms mean you can choose when and how to pay back the loan.
- Tax-advantaged loans generally aren’t counted as taxable income as long as the policy remains in force.
However, there’s an important trade-off: any unpaid loan balance and accrued interest will reduce the death benefit your beneficiaries receive. In extreme cases, if a loan exceeds the policy’s cash value, the policy could lapse, potentially triggering taxes and leaving you without coverage.
Cash Value Withdrawals
If you don’t want to take on loan interest, you can also withdraw cash directly from the policy’s value. Withdrawals up to your cost basis (the premiums you’ve paid) are typically tax-free, while the portion exceeding your basis may be taxable.
The downside is that withdrawals permanently reduce both your cash value and your death benefit, so use this option with a clear purpose such as funding education, a large purchase, or supplementing retirement income and only if it aligns with your long-term goals.
- Use Cash Value to Pay Your Premiums
If maintaining your coverage becomes costly later in life, you can actually use the cash value to pay future premiums, easing the financial burden without losing your policy.
This is especially helpful for people nearing or in retirement who may be on a fixed income. Instead of paying premiums out of pocket each year, the cash your policy has already built up can cover them. In essence, the policy pays for itself.
This approach preserves the protection and potential payout of the policy while freeing up monthly cash flow for living expenses or other priorities.
Related: How Much Life Insurance Coverage Do You Really Need?
- Tap Living Benefit Riders for Unexpected Health Needs
Many life insurance policies, particularly modern ones come with or allow optional living benefit riders (also called accelerated death benefits). These let you access part of your death benefit early if you experience certain qualifying health conditions, such as a terminal, chronic, or critical illness.
How It Works
With a living benefit rider, you don’t need to surrender the policy or borrow against it, you simply access part of the death benefit while still living if you meet the specified criteria.
- Terminal illness rider: Allows access to a portion of the death benefit if life expectancy is limited (often 12–24 months or less) due to a qualifying illness.
- Chronic illness rider: Pays benefits if you are unable to perform everyday activities without assistance, helping fund in-home care or assisted living.
Funds received through accelerated benefits can be used for medical bills, long-term care costs, or even family travel. But beware, accessing these benefits reduces the eventual death benefit your beneficiaries receive.
Also, navigating insurer requirements can be challenging. Disputes over medical evidence and eligibility criteria are not uncommon, so understanding your policy’s fine print ahead of time is essential.
- Use Your Policy for Major Life Expenses
Once your policy has established a reasonable cash value balance, you can apply that value to significant financial goals beyond premiums and health care.
- Education and college costs: Borrowing from your policy to help fund a child’s tuition can be a lower-interest alternative to some education loans.
- Down payment on a home: Your cash value can be used as collateral for a loan or a direct source for a down payment or closing costs.
- Business investment: Borrowing against your policy can help seed a business or cover initial operating costs without needing to qualify for a traditional business loan.
These uses turn life insurance into a kind of personal liquidity reserve, offering flexibility that’s especially useful when markets are volatile or credit conditions are tight.
- Supplement Retirement Income
While life insurance isn’t a primary retirement strategy for most people, the cash value component of certain permanent policies can serve as a supplemental source of income during retirement.
Instead of relying solely on 401(k) or IRA distributions which may trigger taxes upon withdrawal, you could:
- Take tax-free withdrawals up to your cost basis, and
- Tap policy loans to provide income without an immediate taxable event.
However, approaching retirement through life insurance assets requires planning. Using cash value to generate retirement income can reduce your death benefit and potentially affect eligibility for programs like Medicaid or Supplemental Security Income, depending on your financial situation.
- Sell Your Policy Through a Life Settlement
If you no longer need your policy or find premiums unaffordable, another option is to pursue a life settlement, where you sell your life insurance policy to a third party for a cash lump sum.
This generally applies to owners aged 65 or older with a permanent policy that has sufficient face value. The payout you receive in a life settlement is usually more than the surrender value but less than the full death benefit your beneficiaries would have received had you carried the policy to term.
Life settlements can be useful for:
- Funding healthcare expenses
- Boosting retirement savings
- Consolidating debt
- Reallocating assets to other needs
Be mindful that the process often involves broker fees and may have tax implications, so consulting with a financial advisor or tax professional is important before proceeding.
Considerations and Potential Pitfalls
While life insurance can be a flexible financial tool, there are trade-offs and cautions worth noting:
- Policy loans reduce death benefits. If loans and interest exceed cash value, your policy may lapse, potentially triggering taxes and losing coverage.
- Withdrawals also reduce death benefits and may create tax liability if they exceed your cost basis.
- Living benefits have eligibility requirements, and insufficient documentation can delay or deny claims.
- Not all policies provide these features, only permanent policies with cash value do, while term life typically does not.
Ultimately, the decision to use life insurance while alive should be informed by your broader financial goals, liquidity needs, and how each option affects your long-term security and estate planning.
We believe the information in this material is reliable, but we cannot guarantee its accuracy or completeness. The opinions, estimates, and strategies shared reflect the author’s judgment based on current market conditions and may change without notice.
The views and strategies shared in this material represent the author’s personal judgment and may differ from those of other contributors at IntriguePages. This content does not constitute official IntriguePages research and should not be interpreted as such. Before making any financial decisions, carefully consider your personal goals and circumstances. For personalized guidance, please consult a qualified financial advisor.
