Yes, you can use life insurance while you are alive, though it depends entirely on what kind of policy you own. Permanent policies build cash value you can borrow against, withdraw, or cash out. Many policies of any type include riders that pay part of the death benefit early if you become terminally or seriously ill. And in some situations you can sell the policy outright for cash. What you almost certainly can’t do is get money out of a standard term policy, because there is nothing in it to take.
These options are collectively called living benefits, and each one trades future protection for money today.
Cash Value: The Money Inside a Permanent Policy
Whole life, universal life, and other permanent policies split your premium. Part covers the insurance itself, and part goes into an account that grows over time. That account is the cash value, and you can access it while you are alive.
Cash value grows slowly at first. In the early years most of your premium goes to the cost of insurance and the insurer’s expenses, so meaningful balances typically take a decade or more to build. There are three ways to reach it.
Policy loans
You borrow from the insurer using your cash value as collateral. There is no credit check, no approval process, and no repayment schedule. Interest accrues, commonly somewhere in the range of 5% to 8% depending on the policy and the era it was written in.
The catch is quiet but important. Any unpaid loan balance plus accrued interest is subtracted from the death benefit when you die. Borrow $30,000 and never pay it back, and your beneficiaries receive $30,000 less, plus whatever interest piled up. Worse, if the loan and interest grow large enough to exhaust the cash value, the policy can lapse, which ends your coverage and can trigger a tax bill on gains you never saw as cash.
Loans are generally not taxable while the policy stays in force, which is what makes them attractive. Keeping the policy in force is the part people forget.
Withdrawals
You take money out permanently rather than borrowing it. Withdrawals typically reduce the death benefit dollar for dollar, and in some universal life designs by more than that.
For most policies, withdrawals are tax-free up to your basis, roughly the total premiums you have paid, and taxable as ordinary income above that. Modified endowment contracts, usually policies funded very quickly, follow harsher rules where gains come out first and a 10% penalty can apply before age 59½.
Surrender
You cancel the policy and take the cash surrender value, which is the cash value minus any surrender charges and outstanding loans. Surrender charges are steepest in the early years and often disappear after ten to fifteen years. Surrendering ends your coverage permanently, and anything you receive above what you paid in premiums is taxable as ordinary income.
Term insurance has no cash value, so none of this applies. If you are weighing which structure you want in the first place, our comparison of term versus whole life insurance covers the trade-off directly.
Accelerated Death Benefit Riders
This is the living benefit most people already have without knowing it. An accelerated death benefit rider lets you collect part of your own death benefit early if you are diagnosed with a qualifying condition. Many insurers now include a basic version at no additional premium, and it is frequently attached to term policies as well as permanent ones.
There are three common flavors.
Terminal illness
Triggered by a physician’s certification that your life expectancy is below a stated threshold, commonly 12 or 24 months. This is the most widely available version, and it often lets you accelerate a large share of the face amount.
Chronic illness
Triggered when you cannot perform a set number of activities of daily living, usually two out of six such as bathing, dressing, and eating, or when you have severe cognitive impairment. Payments are often monthly rather than a lump sum, and annual limits are common.
Critical illness
Triggered by a specific diagnosis on the insurer’s list, such as heart attack, stroke, or certain cancers. Coverage varies dramatically between companies, so the list matters more than the label.
Whatever you accelerate is subtracted from what your beneficiaries receive, and insurers usually apply a discount or administrative fee because they are paying early. Accelerating $100,000 might reduce the death benefit by somewhat more than $100,000.
On taxes, accelerated benefits paid because you are terminally ill are generally excluded from federal income tax under the same rule that makes death benefits tax-free. Chronic illness benefits get similar treatment but often only when the money goes toward qualified long-term care costs and within annual limits. This is one of the areas where the details genuinely matter, and our overview of whether life insurance is taxable sets out the general framework.
Selling the Policy: Viatical and Life Settlements
If you no longer want or need a policy, you can sometimes sell it to a third party for more than the surrender value. The buyer takes over the premiums and collects the death benefit later.
Viatical settlements involve an insured who is terminally or chronically ill. Proceeds are generally free of federal income tax when the insured has been certified as terminally ill, defined here as a life expectancy of 24 months or less. Chronically ill sellers can also qualify, though the favorable treatment may depend on how the money is used.
Life settlements involve sellers who are not terminally ill, typically people over 65 with a policy they no longer need. These are taxed under different rules, and the amount received above what you paid in premiums can be taxable.
Both are legitimate, regulated transactions in most states, and both deserve caution. Offers vary widely, broker commissions can be substantial, and you are giving a stranger a financial interest in your death benefit along with access to your medical records. Get more than one offer, ask for the commission in writing, and compare the result against simply surrendering the policy.
Other Ways a Policy Works for You Now
- Premium relief. Many permanent policies let you use accumulated cash value to cover premiums temporarily if money gets tight. This keeps coverage alive but drains the account.
- Reduced paid-up insurance is the middle path. Instead of surrendering, you can often convert to a smaller amount of fully paid coverage with no further premiums due.
- Waiver of premium riders. If you become disabled, the insurer pays the premiums for you. Not cash in hand, but it protects the coverage exactly when your income stops.
What to Weigh Before You Tap It
All of these moves cost you something later. Before you pull the trigger, work through three questions.
- Who still depends on this death benefit? If the answer is nobody, using the policy now is straightforward. If a spouse or a disabled child is counting on it, the calculus changes completely.
- Will the policy survive? Ask the insurer for an in-force illustration showing how it performs after the loan or withdrawal. A lapsed policy with an outstanding loan is the worst outcome available, because it ends coverage and creates a taxable event at once.
- What is the tax result in your situation? The general rules above have exceptions for modified endowment contracts, policies that changed hands, and chronic illness benefits.
If your term policy is approaching its end, the conversion rights in your contract may be more valuable than anything else on this list. Our guide to what happens when term life insurance expires covers those deadlines.
Frequently Asked Questions
Can I get money from a term life insurance policy while alive?
Not through cash value, because term policies do not build any. You may still be able to use an accelerated death benefit rider if you become terminally ill, and some term policies can be sold in a viatical or life settlement. Otherwise, a term policy pays only on death.
Do I have to pay back a life insurance policy loan?
There is no required repayment schedule, but the balance plus accrued interest is deducted from the death benefit if you die with it outstanding. If the loan grows past the cash value, the policy can lapse and leave you with a tax bill, so most people repay at least the interest.
Are living benefits from a life insurance policy taxable?
Accelerated death benefits for terminal illness are generally income-tax free, and chronic illness benefits usually are too within limits. Policy loans are not taxable while the policy stays in force. Withdrawals and surrenders are taxable only on the amount above what you paid in premiums.
How long does it take to build usable cash value?
Longer than most buyers expect. Early premiums go largely to the cost of insurance and expenses, so it commonly takes ten years or more before the cash value is meaningful. Ask for an illustration showing projected values by year before you buy.
