How to Get Life Insurance Money While Alive
There are many different ways to get money out of their life insurance policies while they’re still alive, with both term and permanent life insurance. In fact, you can sell the policy if you want.
We’ve all heard of mortgage protection and final expense, two very popular terms to describe life insurance. It is understood that the main purpose of life insurance is to pay for a burial when the insured passes away. It’s also very effective at paying off bills and providing replacement income for survivors. Some people even understand that life insurance has a saving’s component, but most don’t truly understand just how that works. Furthermore, even the death benefit is accessible to the insured while alive under certain conditions.
Permanent life insurance comes with a cash value account that can grow substantially in value in a number of ways via dividends, riders, and even the stock market depending on the variant of life insurance owned. Ok, many of you already knew that. However, I’m guessing you didn’t know that taxes and penalties are levied if you take the money out the wrong way, at inopportune times? Life insurance has a lot of moving parts, rules, and conditions that can complicate matters for those not in the know. It is important to understand exactly how this financial tool works and how to wield it. I want to eventually live in a world where everyone knows how to use life insurance before they die.
You can’t get the best policy through your employer
To get the benefits of life insurance while you are alive, you have to buy your own personal life insurance policy. Reason being, practically all employers that offer life insurance as a benefit only have Term life insurance available, because it’s cheaper. Term life insurance doesn’t have a cash account. You want your own personal policy anyways.
It’s not like health insurance where if you lose your job, you can get on COBRA for a long time until you get a new one. Life insurance gets expensive over time as you age, and you might not even qualify for it, and your workplace might not even offer it in the future. as it stands, they could cut that benefit at anytime. Don’t leave something as important as life insurance in the hands of others.
Most agents don’t know how to design life insurance plans for cash growth.
Ok, maybe that’s a generalization that needs clarifying. Most agents don’t know what they’re doing, period. The reason being is because most agents don’t survive the business long enough to fully understand life insurance. Further exacerbating the problem is the fact that most agents specialize in senior care, for which most are using life insurance in its most basic purpose; to cover a burial.
So sure, most of you have heard of the savings component, a.k.a. the cash value account that comes standard with life insurance plans, but beyond that, have not a clue. If you’re like me, your initial exposure to how the cash value works over time was through an illustration or two that showed very slow cash value growth. You probably thought it was okay, underwhelming perhaps, and certainly nothing to write home about.
What you’ve likely seen is the tip of the iceberg.
The reason the cash growth is slow in most policies is because those plans are not optimized for cash growth. What does that even mean? Let’s break it down into two categories; Whole Life and Indexed Universal Life. For Whole Life Insurance, there are a few factors that accelerate the cash value to levels you’d normally find in a mutual fund. Those factors are the paid up additions dividend, the paid up additions/value enhancement rider, adding a term rider, and lastly, setting up max payments for a given death benefit.
Before I go into these factors, let me just briefly explain dividends.
Dividends (Available for Whole Life Insurance only) are kick-backs from the insurance company when they have a profitable year. They aren’t guaranteed, but so far, most serious life insurance carriers have a good track record of paying them regularly. Now you can receive these dividends in multiple ways. You can opt to receive a check, use it to lower payments over time, or use them to add value to your death benefit. The paid-up additions dividend adds value on top of your cash value and death benefit. Basically, whenever dividends are credited, which is every year historically, more value is added to your cash and death benefit.
Secondly, we will set up a paid-up addition/Value Enhancement rider. Riders are options you can add to your life insurance plan. Most life insurance plans come with several riders, but the PUA/VE rider is the one we’ll focus on for cash growth. This does the same thing as the PUA dividend, except it functions by way of allowing more of your premiums to go toward your cash account and death benefit. The term rider allows for a higher death benefit at a much cheaper cost, and high max payment potential, to really fund the policy optimally.
Lastly, you want to have your payments set up so that you pay the maximum premium possible for a given death benefit. In other words, if your death benefit is 100,000, you have the option to pay normal premium, or the max premium. The max premium will help your cash account and death benefit far faster than the normal payment. I bet you didn’t know you had options. When all these factors combine, you end up with a super policy.
All in all, when everything is set up right, your cash account and death benefit will grow at a rate of round 3-5 percent a year, compounding.
Now let’s talk about how to grow your cash in an Indexed Universal Life Insurance plan.
IULs are similar to whole life, but the payments are more flexible, and the cash value growth isn’t determined by riders or dividends, but by a stock market index, like the S and P 500. Basically, at the end of given period, month to month, year to year, etc, an average is taken and credited to the account. This could be 5 percent, 10 percent, etc. However, there is a limit to how much an account is credited during those periods. This is a called a cap, usually around 13-14 percent.
So if the market is up 20 percent, you get 14 percent credited to your policy. On the other hand, there’s a limit to the downside as well. If the market crashes and goes negative 20 points, you lose nothing. Your cash keeps its value. Nice trade-off I’d say. To make these grow fast, just like with whole life, you want to set up the max payment for a given premium. As a matter of fact, it’s practically mandatory with IULs to pay the max if you want the policy to last.
You see, unlike whole life, when an IUL’s cash value reaches 0, the policy ends (lapses). So be careful to make sure that never happens. IULs are slightly more risky (but very solid if taken care of). Whole life insurance is like a Honda. You can abuse it and it’ll still last. IULs are the muscle cars, flashy and fast, but you better damn take care of it. Never miss a maintenance repair, etc. or else.
IULs also come with options A and B (sometimes C, but it’s usually not that great for our purposes)
Options A and B can generally be switched at any time, and you’ll actually want to switch them at some point and I’ll explain why. Option A keeps the cash value separate from the Death benefit. What this means is, when the cash value increases, the death benefit stays the same. When you die, you receive the death benefit without the cash value. Option B adds the cash value to the death benefit, which requires a higher payment, because the death benefit is higher. You also receive the cash value on top of the death benefit if you pass.
If you want your cash to grow the fastest, start the policy with option B, as it allows for much higher premium payments, which allows for the cash to grow unimpeded. Once you turn 65 or so and you’re no longer bringing in income, or don’t want to fund the policy, it is important to switch to option A. Your policy will still be growing fast, but now the cost of insurance will decrease and allow your policy to float and last forever. In your younger years, the cost of insurance isn’t high enough to impede growth with option b, but after you get into your twilight years, it can get quite expensive and cause the cash value to deplete and potentially crash the policy. Anyway, that’s how you maximize the cash value for an IUL.
How to use the cash account.
So now that we understand how to properly grow the cash account, we must discern how to pull the cash out. There a couple of ways to extract money from your account, and those are withdrawals and loans. With withdrawals, you take the cash out and you don’t have to pay the money back. Policy loans are designed for you to pay them back with interest, but it isn’t necessary. The death benefit to your survivors will be reduced by the balance of the loan. Typically not a big deal.
After a long time funding the policy, the cash value and death benefit become one in the same anyway, so both withdrawals and loans alike lower the death benefit immediately. If you do pay the loan back, you’re paying yourself back essentially, so no harm no foul anyway.
What’s the best option? Loans.
Why? Because with loans you don’t incur taxes or surrender charges. Surrender charges apply to IULs and are typically in effect for the first 10 years, at around 10 percent of the cash value of the policy, and decrease by about a percentage point until the surrender charge is no more. These apply to withdrawals, not loans. Withdrawals also incur taxes, but only on the interest earned in the policy, not the principal, a.k.a the money you paid in. Still, after having compounding interest and max payments for 20 to 30 odd years, that can turn into a big tax bill.
Sounds fine and dandy. What about the loan interest rate? The interest rate isn’t predatory like you’d find in many loans. It is assessed one time, when you pull out the money, and since there is no time frame to pay it back, the amount payable stays the same, instead of increasing every year. The interest rate is usually around 6 percent or so. If you pull 10 grand, you have an interest of around 600 payable. This totals out to 10600, and never increases.
In IULs, you never see the interest, because a collateral account is setup alongside the loan, which credits the same percent as the interest rate.
As you can see, policy loans are the superior option for accessing cash. Cash withdrawals should probably be avoided except for special cases.
Other helpful riders that are valuable while you’re alive
The cash value is great, but it’s not the only way to benefit from your policy while still alive. There are a lot of riders that directly benefit the insured. Most policies come with a disability waiver of premium rider that allows for payments to be skipped for the duration of the total disability. This is the most powerful rider in all of life insurance.
If you become disabled, this will pay your policy premiums and complete your financial plan, when you are unable to. It usually goes to around age 60 or so. So anytime you become disabled before that, it will pay (basically, add money to your cash and keep your policy in force) until that point or the end of the disability. If the disability lasts until and past 60, depending on when you got the policy, it should have enough cash value to fund itself from that point forward.
Getting money out of the death benefit
There are a few riders related to the death benefit, that you can use while alive. This is known as the Accelerated Benefits Rider, which includes Terminal Illness, Chronic illness, and Critical Illness. The accelerated benefits rider pays a policy holder a big chunk of the death benefit if they come down with any of the aforementioned illnesses. A terminal illness is defined as having less than 1 year of living or the insured having to spend the rest of their lives in critical care facility. The Chronic Illness pays out a portion of the death benefit to the insured if they come down with a pre-approved illness that is chronic and generally effects the insured’s ability to function by him/herself anymore. It’s an amazing solution for long term care. Lastly, a critical illness, like cancer, tuberculosis, etc. (the carrier will list the approved conditions) will pay out a portion of the benefits to help with that. And that’s how you get money out of the death benefit. Obviously, there will be less benefit for any survivors upon death, so make sure to balance these options appropriately.
Getting money out of a Term life insurance Policy.
Term life insurance doesn’t come with cash value. So you won’t be able to grow it like an investment over time like with permanent life insurance. However, many carriers offer term life insurance with the Return of Premium Rider. What this does is pay you back every premium you paid in once the policy ends. This does increase the monthly price of the policy. Some argue that this isn’t the best way to go because of the opportunity cost, where in the extra expense on premium could have been invested elsewhere for a greater return. That assumes that the investment will for sure perform, and glosses over the fact that you’re getting the full premium back, not just the portion paying for the ROP rider. With regular term plans without this rider, you don’t get anything back. Overall, I say this is an extremely valuable rider, possibly in all of insurance. Most people would love to get their money back just in case they end up not using the insurance. Here’s the way to do it.
Selling Your Policy.
If you’ve had enough of life Insurance, there’s always the option of selling your policy. There are restrictions that apply. The way it works is, you sell the rights to the policy. It’s still on your life, and when you die, the death benefit goes to the buyer. You arrange a meeting with a financial professional that specializes in this and they set you up with a buyer. You’ll generally receive somewhere between 13 and 21 percent of the death benefit.
Generally, the more attractive policies are on older, sicker people and it must be a permanent policy. If you don’t fit that criteria, you’ll find it hard to get a buyer. A commission of around 9 percent is paid to the broker upon the sell.
Selling a life insurance policy can work for some, it just depends on the situation. Are you unable to pay your premiums? Have you used up most of your cash value? Do you no longer have a need for the death benefit? Is it worth it? You have to ask yourself these questions before you consider selling the policy.
Conclusion
There are many ways to get the most out of a life insurance policy, even while alive. Obviously, the main purpose of life insurance is to pass on money to survivors to pay for a funeral and other bills, but that’s not the only use for this great financial tool. The cash account provides amazing, secure savings that have competitive growth in relation to traditional investment vehicles like 401ks, mutual funds, and such.
To fully optimize those savings requires an insurance agent that really knows how to design a policy for growth. If it fits your budget to do it this way, there is seriously nothing to lose. You can even get all of your money back from a term life policy through the ROP rider. If you’re not using the living benefits in a life insurance policy, you’re not getting the proper bang for your buck. If all else fails, just sell it. Just remember that life insurance isn’t only for your survivors. Use it to its fullest while you’re still alive.
Blue Crush Insurance
