How to Use Life Insurance While You’re Alive

You may be able to use your life insurance policy while you’re still alive if it has a cash value component.

Ruchi Gupta - Author

Aug. 5 2022, Published 6:22 a.m. ET

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Once you’ve decided that life insurance is worth it, you may be wondering how to use it while you’re still alive. Depending on the policy type, a life insurance plan can benefit you in life and in death.

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As the saying goes, you can't avoid death or taxes. Your state may drop the sales tax on certain purchases or lower property tax to offer relief, but the IRS will still want its cut of your paycheck. As for death, it can devastate your family’s finances if you don’t budget for it while you’re still alive. To safeguard their family’s finances, people buy life insurance.

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How does life insurance work?

If you have life insurance, your family will receive a payment when you die, with the amounts varying from a few thousand dollars to millions. There are also different types of insurance to choose from, such as term life insurance or permanent life insurance.

You’re required to make monthly payments called premiums to the insurance company during the policy period. The premium amounts depend on factors such as the policy value and length. When you die, the insurance company will pay death benefits to your family.

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Can you use life insurance while you're still alive?

Whereas life insurance is primarily meant to take care of your family when you die, you may access benefits while you’re still alive if it's a whole life insurance or universal life insurance plan. These "permanent life insurance policies" come with an investment component, the "cash value."

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With these plans, a portion of the monthly premiums you make go into funding the dead benefits, and another portion goes into the cash value account. The cash value component is specifically designed to provide benefits to the policyholder while they’re still alive.

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How to use a life insurance policy while you're still alive

It may take several years to build enough cash value on your policy. Once the money is there, you may withdraw it or use it as collateral for a loan from the insurance company. Borrowing against the cash value offers several advantages over taking a regular bank loan, such as not needing a credit check, lower interest rates, and a flexible repayment period.

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You can spend the money you get through your policy’s cash value on anything you want: funding your retirement account, making a downpayment on a house, or paying your kids' tuition.

Whereas loans backed by cash value have some tax advantages, withdrawals may be subject to income tax. If you die with an outstanding loan against your life insurance policy’s cash value, the loan balance would be subtracted from the death benefits to your family. And if you leave money in the cash value account when you die, that would go to the insurance company, not your family.


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