How to Use Life Insurance While You're Still Alive

Yes, certain life insurance policies let you access money while you're alive. Permanent policies like whole life and universal life build cash value over time that you can borrow against, withdraw or use as loan collateral. Some term and permanent policies also include accelerated death benefits that pay a portion of the death benefit if you're diagnosed with a terminal or chronic illness. Knowing your options can reveal financial flexibility you didn't realize you had.

Whole, universal, variable and term life policies offer living access, depending on your policy details:

• Whole life insurance builds guaranteed cash value at a fixed rate. You can borrow against it or make withdrawals, and withdrawals permanently reduce the death benefit.
• Universal life insurance accumulates cash value with more flexibility in premium payments. Access rules vary by policy type.
• Variable life insurance ties cash value to market investments. The amount available to access depends on investment performance.
• Term life insurance has no cash value. Some policies include living benefit riders for terminal illness, chronic illness or disability.

You can borrow against your policy's cash value once it reaches a predetermined balance, usually after several years of premium payments. Policy loans don't require a credit check, and you're not obligated to repay on any set schedule. The insurer charges interest, usually 5% to 8% annually, that accrues on the outstanding balance. Because you're borrowing against your own policy rather than receiving a distribution, you won't owe taxes on the loan.

To start a policy loan, contact your insurer directly or log into your account portal. Life insurance companies process requests within a few business days and deposit funds directly to your bank account.

A cash value withdrawal lets you take money directly out of your policy rather than borrowing it. Unlike loans, withdrawals don't have to be repaid, but they permanently reduce both your cash value and your death benefit. Withdrawals up to your cost basis are tax-free. Amounts above that threshold are taxed as ordinary income in the year you take them.

Most insurers allow partial withdrawals with a minimum threshold, often $500 or more. Some policies also charge a surrender fee for early withdrawals, particularly during the first 10 to 15 years of the policy. Check your policy documents or call your insurer before withdrawing to understand any fees and tax consequences. For a deeper look at how this works across policy types, read MoneyGeek's guide on how to borrow from life insurance.

Accelerated death benefits let you collect a portion of your death benefit while you're still alive if you're diagnosed with a qualifying medical condition. Many life insurance policies include a basic accelerated death benefit for terminal illness at no extra cost. Additional living benefit riders, available for purchase, can expand coverage to chronic illness, critical illness or long-term disability.

A terminal illness rider pays out when a physician certifies a life expectancy of 12 to 24 months. Chronic illness riders generally require proof that you can't perform two or more activities of daily living. Any amount you receive reduces the death benefit paid to your beneficiaries, and some insurers apply a discount to the payout to account for early payment.

Yes, a process called collateral assignment lets you pledge your life insurance policy as security for a bank or private loan. Lenders sometimes accept permanent life insurance as collateral because of its guaranteed cash value. If you die before repaying the loan, the lender collects what you owe from the death benefit before your beneficiaries receive the remainder.

Term life insurance can serve as collateral in some cases. Lenders generally prefer permanent policies with stable cash value. The process requires a collateral assignment form through your insurer and takes one to two weeks.

If you no longer need your coverage, you can exit the policy through surrender or a life settlement. Both options provide a cash payout but permanently end your coverage and the death benefit your family would receive.

• Surrendering Your Policy to the Insurance Company: You cancel the policy and receive its accumulated cash surrender value, minus any outstanding loans and surrender charges. Surrender charges are highest in your early policy years and decline over time. The surrender value is taxable to the extent it exceeds what you paid in premiums.
• Selling Your Policy in a Life Settlement: A life settlement lets you sell your policy to a third-party buyer for more than the surrender value but less than the face amount. Buyers are institutional investors who continue paying premiums and collect the death benefit when you die. Life settlements are available primarily to policyholders over 65 or those with serious health conditions. Proceeds may be subject to ordinary income tax and capital gains tax depending on your cost basis.

Accessing your policy's living benefits can be a smart financial move in the right circumstances, but there are trade-offs to consider:

Pros

• Borrowing against cash value bypasses the credit system entirely. No approval required and no credit report inquiry
• A qualifying terminal illness unlocks accelerated death benefits while you're alive
• Withdrawals up to your cost basis come out tax-free
• For sellers who qualify, a life settlement pays more than surrendering the policy directly to the insurer

Cons

• Every loan or withdrawal cuts into the death benefit your beneficiaries will receive, permanently
• A policy that lapses with an outstanding loan balance can produce a large tax bill at an unexpected time
• Life settlements are available to a narrow group: generally older policyholders or those with serious health conditions
• In the early years of a policy, surrender charges can take a significant portion of the payout