Updated March 14, 20223 min read
Life insurance is meant to be used as financial protection for the family members left behind after a loved one unexpectedly dies. The policyholder selects the best coverage for their family’s needs and makes annual or monthly payments to keep that coverage active. Then, if the policyholder dies and the policy is still in force, the insurance company distributes the death benefit to the policy’s beneficiaries.
But if you’re ill and added certain riders to your policy or have cash value life insurance, you may be able to cash in on your life insurance policy while you’re still alive, though doing so depletes the payout your beneficiaries get or costs you extra money. Because of this, cashing in on your life insurance policy should generally be a last resort. Separate insurance policies or investment vehicles are better options for financial protection while you are still alive.
Life insurance riders can provide early access to life insurance benefits while you’re still alive if you fall terminally ill or require long-term care.
Some permanent life insurance policies come with a cash value component that you can withdraw from.
Canceling your life insurance policy only pays out if your permanent policy has a cash value.
Whole life insurance policies have an investment-like cash value component that can be accessed before you die, but the amount you get depends on your insurer. Cashing out the policy comes with administrative fees and is usually taxed, making it less cost-efficient than traditional investments or savings accounts. It’s generally not recommended to get a whole life insurance policy as an additional savings account unless you’ve maxed out all other investments.
If you do decide to use whole life insurance to save, there are a few ways you can take out money from the cash value:
Withdraw money or take out a loan against the policy: You can take out a loan against your policy’s cash value at interest rates lower than other types of loans, but if you don’t pay the loan back while you are alive, it is withdrawn from the death benefit your beneficiaries receive when you die.
Surrender the policy: You can surrender the policy and get the cash surrender value. Depending on how long you’ve had the policy, you might have to pay surrender fees and taxes. Term life insurance policies do not pay out any money if they are surrendered because there is no cash value.
Selling your permanent life insurance policy is generally not recommended. When you sell a life insurance policy, you get cash from a third-party broker or buyer that pays premiums and receives the death benefit when you die. The return on selling a permanent life insurance policy tends to be very low and is subject to additional fees.
You won’t get any money back for the premiums you paid if you cancel your term life insurance coverage. With certain permanent life insurance policies, you may be able to keep the cash value your policy accrued. The payout stipulations vary by insurer, so talk to your insurance company before canceling to explore your options.
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Life insurance riders are supplemental terms and conditions added to your policy at an extra cost. Some offer extra financial protection to your beneficiaries after you die, while others pay out to you if you have certain illnesses, qualifying medical conditions, or require long-term care.
Life insurance riders that provide early access to benefits while the policyholder is still alive include:
The accelerated death benefit insurance rider pays out if you have a terminal illness and a life expectancy of 12 to 24 months.
The critical illness rider pays out if you have an illness that will leave you with extremely high medical expenses. This includes cancer, heart attack, stroke, ALS, kidney failure, major organ transplant, coma, or paralysis.
The chronic illness rider pays out if your illness prevents you from performing two of the six activities for daily living — eating, bathing, getting dressed, toileting, transferring, and continence.
The long-term care pays out if you are confined in a nursing home for a certain period of time or expect to stay there permanently.
Because these riders withdraw from the death benefit to pay out, separate insurance policies that specifically cover illnesses are usually better options to ensure your beneficiaries still get financial support. There are also limits on how much money you can receive from each rider.
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You only receive part of your coverage amount if you cash out an accelerated death benefit rider. According to policies offered in the Policygenius marketplace as of December 2021, if you have $1 million of life insurance coverage, most insurers will only pay out a portion (say, 50%) of that $1 million while you are still alive. The amount you’re eligible to receive is listed in your policy. The remainder of the life insurance benefit is paid out to your beneficiaries after you die.
While you technically don’t have to die to cash in on your life insurance policy, accessing those funds while you’re still alive comes with significant trade-offs, such as depleting the death benefit or paying higher premiums. Instead, consider separate insurance policies and savings accounts that are meant to be utilized while you are alive.
If your policy has a cash value, you can take out a loan against the cash value (which needs to be repaid) or surrender your policy completely to withdraw the cash. You can only withdraw from some of the death benefit if you have a rider that pays out for your specific situation.
If your term life expires and you don’t die, you no longer have coverage and are not refunded any of the premiums. Whole life insurance policies are meant to last for life, but if you surrender your policy, you are not given any accrued cash value.
Life insurance won’t pay out the full death benefit if you don’t die, but some of it can be used if you have a critical illness.