Life Insurance and Access to Cash

Life insurance offers much more than a death benefit when you die. Clients may also be able to take advantage of Living Benefits to get money when there’s a qualifying event, and they can take loans or withdraw cash (if they have a permanent life insurance policy and have sufficient cash value).

But how do they choose between those options if they are in need of money?

Key Considerations

• Impact on the death benefit: Withdrawals and accelerating the death benefit reduce (or eliminate) the death benefit, while loans can keep it intact (if they are repaid later).
• Tax consequences: Accelerated benefits and loans are usually tax free, but withdrawals may be taxable if they exceed the policy’s cost basis.
• Repayment: Loans allow for flexible repayment, while withdrawals and accelerated benefits are final and can’t be paid back.
• Urgency: Loans and withdrawals are much faster than an accelerated death benefit claim.
• Amount of money needed: For a permanent life insurance policy, an accelerated death benefit can provide a larger amount of money if the cash value is low and the claim results in a higher payout.

Pros and Cons

Here’s quick overview of pros and cons that you can share with clients:

Accelerating the Death Benefit

• What it is: Accessing a portion of the death benefit when there’s a qualifying event (depending on state approval, this can include terminal illness, chronic illness, critical illness or injury, or a qualifying diagnosis of Alzheimer’s disease or Lewy Body Dementia).
• Pros: 
  • The accelerated death benefit is typically tax free.
  • Does not have to be repaid.
  • It’s the only option on term policies.
  • If you have permanent life insurance, it may be a great choice when your policy has a low cash value, which will be especially true in the early years of owning a policy.
• Cons: 
  • Reduces (partial acceleration) or eliminates (full acceleration) the death benefit for beneficiaries.
  • You will only receive a portion of the death benefit, not the full amount.
  • In some cases, the accelerated death benefit will be minimal. How much you would receive depends on factors such as the qualifying event and the impact on life expectancy.

• When to consider this option:
  • There’s a qualifying event with significant medical expenses and you need a larger amount of money than a loan or withdrawal can provide (because your permanent life insurance policy has a low cash value).
  • You have  a term policy and it’s your only option to access money.
  • The accelerated death benefit is large enough to justify reducing or eliminating the death benefit.

Taking a Loan

• What it is: Borrowing against the accumulated cash value of your policy.
• Pros: 
  • For qualifying policies, loans are tax free.
  • Flexible repayment: Loans do not require a repayment schedule.
  • Indexed Universal Life (IUL) policies have multiple loan options. With certain loan types, the loan amount can still earn interest based on the performance of an index — you may be able to earn enough interest to more than cover the cost (interest paid) of the loan.
• Cons: 
  • You pay interest on the loan amount.
  • Unpaid loans can result in policy lapse, so loans need to be managed carefully.
• When to consider this option:
  • Your policy has a high cash value.
  • You need immediate cash for personal expenses or financial emergencies.
  • You prefer to maintain the full death benefit for your beneficiaries (by paying the loan back later).

Learn more about life insurance loans

Withdrawing Cash

• What it is: Permanently withdrawing a portion of the cash value of the policy.
• Pros: 
  • No interest charges.
  • No repayments.
• Cons: 
  • Reduces the death benefit.
  • Withdrawals can’t be paid back.
  • Withdrawals beyond the amount you’ve paid into the policy (cost basis) can be taxable.
• When to consider this option: 
  • You need immediate cash for personal expenses or financial emergencies.
  • You don’t want to take on any debt.
  • Your policy’s cash value is large enough that making a partial withdrawal will not cause the policy to lapse, and the value of the policy can continue to grow.