Life insurance is often thought of as a product to provide financial security for your loved ones after you pass away. However, life insurance can provide significant benefits while you are still alive. Having life insurance in place can give you peace of mind knowing your family will be taken care of financially if something unexpected were to happen to you. But life insurance while alive can also offer several advantages that you can take advantage of during your lifetime.
What is Life Insurance?
Life insurance is a contract between an insurance policy holder and an insurance company that provides a monetary payout to designated beneficiaries upon the policy holder’s death. In exchange for regular premium payments, the insurance company agrees to pay out a lump sum payment known as a “death benefit” when the policyholder dies.
Life insurance policies come in two main forms – term and permanent life insurance. Term life insurance provides temporary coverage, usually lasting 10-30 years, and pays out only if you die within the term period. Permanent life insurance provides lifelong protection as long as you continue paying the premiums. It also has an investment component that allows you to accrue cash value that you can borrow against or withdraw while still living.
How Life Insurance Works While Alive
Life insurance can provide several advantages for policyholders while they are still living. Here are some of the key benefits:
Cash Value Accumulation
Permanent life insurance includes a cash value component that grows on a tax-deferred basis over time. This means you can accumulate savings that grow tax-free until you make a withdrawal. The cash value earns interest at a rate set by the insurance company and it can be used to fund loans, withdrawals, or paid-up additions that allow you to increase your death benefit. Having access to cash value means you have funds you can tap into during retirement or to supplement your income at any age without having to liquidate other assets.
Certain permanent life insurance policies come with “living benefits” that allow you to access part of your death benefit while alive if you become terminally ill or need funds for long-term care. For example, some policies offer an “accelerated death benefit” of up to 50% of the total death benefit that can be paid out if you are diagnosed with a terminal illness and have a life expectancy of 12 months or less. This allows you to use funds during a difficult time rather than waiting for a payout after you pass.
Disability Income Rider
Some policies offer a disability income rider that will provide monthly payouts if you become disabled and cannot work. This protects you from loss of income and provides a supplemental source of funds until you can get back to work or transition onto long-term disability insurance. The disability payouts do not reduce the death benefit that your beneficiary would receive.
Wealthy individuals can use life insurance policies to finance other expenses through premium financing. This complex strategy involves borrowing money from a lender to pay the premiums on a permanent life insurance policy, then using part of the policy’s cash value accumulation to repay the loan interest. This allows you to keep your policy in force while effectively shifting the cost of premiums to a lender. The remaining cash value continues growing on a tax-deferred basis.
Key Benefits of Life Insurance While Alive
There are a few key advantages life insurance can provide during your lifetime:
- Access to cash value funds on a tax-advantaged basis for supplemental income or to pay off debts
- Living benefits to cover expenses if facing a terminal illness
- Disability income payments to replace lost income
- Premium financing strategies to reduce insurance costs
Having these options available through a permanent life insurance policy can give you financial flexibility and peace of mind.
How to Choose the Right Policy
If you want to take advantage of the living benefits of life insurance, it is important to choose the right type of permanent policy. Here are some tips:
- Look for a policy with strong cash value growth potential and living benefit options tailored to your needs. A mutual company that pays dividends may offer better growth compared to a term policy.
- Evaluate the financial strength of insurers by checking ratings from agencies like A.M. Best. Choose a highly-rated company.
- Pick an appropriate death benefit based on the amount of income you want to replace for dependents and other financial goals.
- Select a premium payment schedule that aligns with your budget. Options include annually, semi-annually, quarterly, or monthly payments.
- Work with an experienced insurance agent or financial advisor to structure the ideal policy and premiums for your situation.
The pros and cons of relying on life insurance while alive should also be weighed carefully when making policy selections.
Advantages and Disadvantages of Using Life Insurance While Living
There are several potential advantages to tapping into life insurance benefits while you are living:
- Income tax-free access to cash value funds to supplement retirement income or cover emergency costs
- Avoiding the need to liquidate other assets or investments at an inopportune time
- Funding living expenses if faced with a terminal illness or needing long-term care
- Replacement income if you become disabled and cannot work
- Estate planning benefits such as gifting cash value to heirs or charities
However, there are also some drawbacks to consider:
- Reduced death benefit for beneficiaries if cash value is withdrawn
- Possibility of higher premium costs for policies with living benefit options
- Potential taxes and surrender charges if you withdraw cash value from a permanent policy
- Repayment obligations if financing premiums through policy loans
- Forfeiture of coverage if unable to keep up with premium payments
Understanding these tradeoffs will help you decide if using life insurance for living needs as well as death benefit protection is the right approach for your financial situation. Proper policy structuring is key to maximizing benefits during your lifetime while still leaving an adequate legacy.
Critical Factors to Keep in Mind
If you plan to utilize life insurance while alive, here are some critical factors to keep in mind:
- Don’t withdraw or borrow more cash value than you need – this erodes the death benefit for beneficiaries.
- Compare loan rates and terms if financing premiums – a lower cost loan reduces the impact on policy values.
- Avoid canceling the policy – work with the insurer to reduce or stop premium payments if necessary to maintain coverage.
- Monitor cash value growth and re-evaluate financing if the policy performance is poor.
- Consult a tax advisor about the tax implications of withdrawals, loans, accelerated benefits, etc.
- Review beneficiaries regularly and provide them guidance on options when claiming proceeds.
- Work with a financial advisor to coordinate the life insurance into your overall financial plan and goals.
Following prudent practices will enable you to unlock the full benefits of maintaining life insurance during your lifetime.
Key Takeaways on Life Insurance While Living
Some of the key points on life insurance while alive include:
- Permanent policies allow tax-deferred cash value growth you can access prior to death.
- Living benefits through accelerated death payments or disability income riders provide funds during illnesses or loss of income.
- Premium financing leverages policy cash value to reduce overall costs.
- Be mindful of reducing the death benefit and compare policy loan costs if borrowing against cash value.
- Pick a financially sound insurer and work with an advisor to structure the optimal policy for your needs.
- Life insurance while living provides significant advantages that term policies lack, but sound planning is vital.
Life insurance is not just a product to provide for loved ones after you pass away – it can offer many valuable benefits during your lifetime if structured properly. Permanent policies with strong cash value growth and living benefit options offer tax-advantaged access to funds, income replacement if disabled, and payouts for terminal illness that term insurance does not provide. However, it is important to weigh the pros and cons, coordinate policies with your overall financial goals, and work with an advisor to maximize benefits while living and also leaving an adequate legacy. With proper planning, life insurance while alive can be a powerful financial tool.