Can you use your life insurance while alive?
The Bottom Line
Permanent life insurance policies will allow you to access the cash portion of your account while you're alive. Term life insurance, meanwhile, does not have a cash element for policyholders to access. So, if you're planning on using your life insurance as a backup cash resource you'll want to avoid term policies.
If you need cash and want to take it from your life insurance policy, you typically have four options: withdraw, borrow, surrender, or sell. Here's an overview of each option along with the pros and cons you want to consider.
You can only borrow against a whole life insurance policy or a universal life insurance policy. Policy loans reduce the death benefit if not paid off. Life insurance companies add interest to the loan balance, which if unpaid can cause the policy to lapse. Only permanent life insurance builds cash value.
Can you cash out term life insurance? Since a term life insurance policy doesn't come with a cash value component, it's not possible to cash it out. This policy solely includes a death benefit that your beneficiaries may receive if you die before the end of the policy's term.
Life insurance loans are only available on permanent life insurance policies — such as whole life and universal life — that have a cash value component. You likely can't borrow against a term life insurance policy since it probably doesn't have cash value. Learn more about term vs. whole life insurance.
How long does it take to borrow against life insurance? It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.
You will typically find it listed separately in your life insurance statements. The net cash value will generally be lower than your total accumulated cash value for the first several years of coverage, as it's reduced by fees and surrender charges.
Cash value: In most cases, the cash value portion of a life insurance policy doesn't begin to accrue until 2-5 years have passed. Once cash value begins to build, it becomes available to you according to your policy's guidelines.
The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.
How to use life insurance to build wealth?
- Cash Value Accumulation. Life insurance policies, such as Farm Bureau Insurance's whole life policy, often come with a cash value component. ...
- Tax Advantages. ...
- Estate Planning. ...
- Business Succession Planning. ...
- Charitable Giving.
Age | Term length | Average monthly rate |
---|---|---|
40 | Term length10 years | Average monthly rate$47.41 |
40 | Term length15 years | Average monthly rate$61.33 |
40 | Term length30 years | Average monthly rate$137.89 |
50 | Term length10 years | Average monthly rate$112.67 |
To make the infinite banking concept work for you, simply request a loan from your life insurance policy. This is accomplished by submitting a policy loan request form. Once they verify the funds available in your life insurance cash value, the insurance company sends you a check or processes it electronically.
The good news is that you likely won't need to worry about having a claim denied if you're truthful with your life insurance company from the start. Instances of lying, criminal activity, or dangerous behavior that's not disclosed upfront could all be reasons life insurance won't pay out.
Examples of Cash Value Life Insurance
An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.
No, with a standard term life insurance policy, you won't be receive anything back if you outlive your life insurance. So, what happens at the end of your term life insurance? Your life insurance will simply expire and you can either take out a new policy or look into other types of financial protection.
When this happens, your beneficiaries lose their inheritance from the life insurance, and you lose the opportunity to use the money again in the future. In addition, if you don't pay the loan back and the amount you borrow reaches the amount of cash value (or exceeds it), you may find yourself owing taxes.
By putting up your life insurance, you could improve your chances of qualifying for a mortgage and at a lower interest rate. If your life insurance policy has cash value, you could take that money out through a loan or withdrawal and put it toward your home purchase.
How does Debt Free Life® work? For individuals who are paying their bills on time and contribute to a savings or retirement account, Debt Free Life is a modern way to pay off your debt using the cash value of a specialized whole life insurance policy. Extra funds are redirected into the cash value of your policy.
Pros of life insurance loans
It's simple to borrow provided you have enough cash value — and there's no credit or income check involved. You can get excellent terms such as a comparatively low interest rate and no strict repayment schedule.
Which type of life insurance policy generates immediate cash value?
Single premium whole or universal life insurance policies are the types that generate immediate cash value. However, you can also secure immediate life insurance coverage with a no exam term or whole life insurance policy.
Cash value typically doesn't accrue for the first two to five years of a policy's term. It can take decades for it to accumulate into a significant amount. Exactly how quickly the cash value grows depends on the type of policy.
The Bottom Line
Paid-up life insurance means your whole life insurance policy is paid in full, remains in force, and you don't have to pay any more premiums.
Term life is typically less expensive than a permanent whole life policy – but unlike permanent life insurance, term policies have no cash value, no payout after the term expires, and no value other than a death benefit.
Traditional investment accounts typically offer higher returns and more flexibility than whole life insurance, but whole life can provide a relatively low-risk supplement to these retirement savings methods, as long as you're confident you can afford the premiums for the lifetime of the policy — or in this case, until ...
References
- https://money.com/reasons-why-life-insurance-wont-pay-out/
- https://www.policygenius.com/life-insurance/whole-life-insurance-rates/
- https://www.bolicoli.com/bank-owned-life-insurance-facts-and-figures/
- https://www.thrivent.com/insights/life-insurance/how-to-use-life-insurance-to-build-wealth
- https://insuranceproshop.com/make-million-dollars-selling-life-insurance/
- https://www.forbes.com/advisor/life-insurance/reasons-for-claim-denial/
- https://bankingtruths.com/banks-branch/
- https://www.cnbc.com/select/what-is-cash-value-life-insurance/
- https://www.insurancebusinessmag.com/us/guides/want-to-sell-life-insurance-from-home-follow-this-guide-467508.aspx
- https://www.policygenius.com/life-insurance/how-do-life-insurance-companies-make-money/
- https://www.cbsnews.com/news/how-much-cash-is-a-100000-life-insurance-policy-worth/
- https://www.cnbc.com/select/how-to-borrow-against-life-insurance/
- https://www.quickquote.com/which-type-of-life-insurance-policy-generates-immediate-cash-value/
- https://www.fidelitylife.com/life-insurance-basics/permanent-life-insurance-101/cash-value-life-insurance/
- https://www.progressive.com/answers/what-happens-when-term-life-expires/
- https://www.policygenius.com/life-insurance/can-creditors-take-my-life-insurance/
- https://smartasset.com/financial-advisor/where-do-millionaires-keep-their-money
- https://www.marketwatch.com/guides/insurance-services/how-to-borrow-against-life-insurance/
- https://www.progressive.com/answers/million-dollar-life-insurance-policy/
- https://www.quora.com/How-much-cash-can-be-deposited-into-a-savings-bank-account-per-year-without-being-taxed-by-the-Internal-Revenue-Service-IRS
- https://www.bankrate.com/insurance/life-insurance/how-life-insurance-payouts-work/
- https://www.progressive.com/answers/when-to-get-life-insurance/
- https://lifeinsurance.adityabirlacapital.com/articles/wealth-insurance/difference-between-sum-assured-and-fund-value
- https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance/
- https://smartasset.com/life-insurance/how-to-use-life-insurance-while-alive
- https://www.jpmorgan.com/insights/investing/investment-strategy/how-to-use-life-insurance-as-a-financial-asset
- https://money.usnews.com/money/personal-finance/family-finance/articles/how-you-can-protect-your-money-in-the-wake-of-banking-collapses
- https://www.progressive.com/answers/life-insurance-loans/
- https://time.com/personal-finance/article/average-cost-of-life-insurance/
- https://www.businessinsider.com/personal-finance/is-money-safe-in-bank-during-recession
- https://www.marketwatch.com/guides/insurance-services/can-i-sell-my-life-insurance-policy/
- https://www.bankrate.com/insurance/life-insurance/cancel-life-insurance/
- https://www.businessinsider.com/personal-finance/average-life-insurance-rates
- https://www.trustage.com/learn/life-insurance/cash-out-policy
- https://www.marketwatch.com/guides/insurance-services/infinite-banking/
- https://www.investopedia.com/articles/professionals/101215/how-hard-career-selling-life-insurance.asp
- https://cfbinsurance.com/2023/08/22/build-wealth-life-insurance/
- https://www.valuepenguin.com/life-insurance/cash-value-life-insurance
- https://www.bankrate.com/insurance/life-insurance/is-life-insurance-worth-it/
- https://law-kc.com/articles/five-reasons-why-insurance-companies-do-not-fairly-pay-accident-claims
- https://www.legalandgeneral.com/insurance/life-insurance/guides/outliving-life-insurance/
- https://www.fool.com/terms/v/value-fund/
- https://www.cbsnews.com/news/how-to-use-life-insurance-while-alive/
- https://www.forbes.com/advisor/life-insurance/how-it-works/
- https://www.investopedia.com/articles/pf/07/unwanted_policies.asp
- https://www.aflac.com/resources/life-insurance/reasons-life-insurance-wont-pay-out.aspx
- https://www.marketwatch.com/guides/insurance-services/20-year-term-life-insurance/
- https://jpricemcnamara.com/what-lab-results-can-cause-life-insurance-denials/
- https://www.guardianlife.com/life-insurance/how-term-life-works
- https://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp
- https://fidelitylife.com/life-insurance-basics/permanent-life-insurance-101/cash-value-life-insurance/
- https://brite.co/blog/jewelry-insurance/how-do-insurance-companies-make-money/
- https://www.policygenius.com/life-insurance/high-net-worth/
- https://www.marketwatch.com/guides/insurance-services/million-dollar-life-insurance-policy-cost/
- https://www.kaplanfinancial.com/resources/career-advancement/15-reasons-insurance-agents-fail
- https://www.aflac.com/resources/life-insurance/affordable-life-insurance-for-seniors.aspx
- https://finance.yahoo.com/news/where-millionaires-keep-money-070638027.html
- https://www.cnet.com/personal-finance/banking/advice/what-happens-to-my-money-if-my-bank-closes-down/
- https://www.edelweisstokio.in/b/insurance-glossary/what-is-the-importance-of-cash-value-in-life-insurance
- https://www.amritafinancial.com/life-settlement-alternatives
- https://www.investopedia.com/articles/personal-finance/121914/understanding-life-insurance-loans.asp
- https://www.policygenius.com/life-insurance/life-insurance-vs-401-k/
- https://www.bankrate.com/insurance/life-insurance/lying-on-application/
- https://www.nerdwallet.com/article/insurance/best-life-insurance-companies
- https://www.iii.org/article/8-smart-steps-for-buying-life-insurance
- https://www.quickquote.com/what-does-a-500000-life-insurance-policy-cost/
- https://www.occ.treas.gov/topics/supervision-and-examination/capital-markets/balance-sheet-management/boli/index-boli.html
- https://www.actec.org/resource-center/video/understanding-life-insurance-policy-ownership/
- https://www.sofi.com/learn/content/how-to-insure-excess-deposits/
- https://quility.com/debt-free-life/
- https://www.lsa-llc.com/how-much-can-you-sell-a-100000-life-insurance-policy-for/
- https://www.marketwatch.com/guides/insurance-services/life-insurance-contestability-period/
- https://www.progressive.com/answers/return-of-premium-life-insurance-rider/
- https://www.investopedia.com/ask/answers/04/032604.asp
- https://www.tataaia.com/blogs/financial-planning/what-happens-if-the-insured-dies-just-after-buying-life-insuranc.html
- https://www.iii.org/article/if-i-cant-pay-my-premium-what-should-i-do
- https://www.forbes.com/advisor/life-insurance/cash-value-life-insurance/
- https://www.linkedin.com/pulse/why-insurance-agents-so-rich-agentdeskva
- https://www.investopedia.com/ask/answers/111314/how-can-i-borrow-money-my-life-insurance-policy.asp
- https://www.forbes.com/advisor/banking/how-much-cash-should-you-keep-in-the-bank/
- https://www.aflac.com/resources/life-insurance/what-happens-when-your-life-insurance-beneficiary-is-deceased.aspx
- https://www.aflac.com/resources/life-insurance/can-you-cash-out-a-term-life-insurance-policy.aspx
- https://www.fdic.gov/resources/deposit-insurance/faq/index.html
- https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds
- https://www.investopedia.com/which-types-of-deaths-are-not-covered-by-life-insurance-5094285
- https://www.moneygeek.com/insurance/life/what-types-of-death-not-covered/
- https://www.iii.org/article/what-are-principal-types-life-insurance
- https://www.progressive.com/answers/multiple-life-insurance-policies/
- https://www.lhlic.com/consumer-resources/how-does-whole-life-insurance-work/
- https://www.quickquote.com/what-is-cash-value-life-insurance/
- https://www.trustage.com/learn/life-insurance/does-life-insurance-pay-out
- https://www.investopedia.com/can-you-use-life-insurance-to-buy-a-house-7559583
- https://www.fdic.gov/resources/deposit-insurance/
- https://fidelitylife.com/life-insurance-basics/life-insurance-101/reasons-life-insurance-wont-pay-out/
- https://www.progressive.com/answers/term-vs-whole-life-insurance/
- https://www.thrivent.com/insights/life-insurance/how-to-use-whole-life-insurance-as-an-investment
- https://eandyagency.com/blog/why-multi-millionaires-and-billionaires-buy-life-insurance/
- https://finance.yahoo.com/news/4-most-popular-banks-millionaires-150054420.html
- https://www.investopedia.com/ask/answers/052015/what-main-business-model-insurance-companies.asp
- https://www.usnews.com/insurance/life-insurance/when-to-draw-cash-from-life-insurance-policies
- https://www.aflac.com/resources/life-insurance/borrowing-against-life-insurance.aspx
- https://www.policygenius.com/life-insurance/alcohol/
- https://www.linkedin.com/pulse/bank-owned-life-insurance-tier-1-asset-banks-gaurav-mohanty
- https://www.investopedia.com/what-happens-if-my-bank-fails-7378029
- https://www.anorak.life/life-insurance/does-life-insurance-always-pay-out
- https://www.steadfastagents.com/whats-fully-paid-up-life-insurance-policy/