You can maximize a life insurance policy and reap its benefits while you're alive by taking advantage of features like loans, withdrawals, and riders. You can also "sell" it and receive your life insurance settlement as a lump sum. All these are "additional" options with specific policies (usually permanent life insurance, such as whole, universal, and variable life).
Given those perks, having the right life insurance policy can give you peace of mind knowing you have an additional source of funds you can use and tap. If you pass away, your beneficiaries will also receive a cash payout. They can use the money for burial and final expenses, which, according to the Life Insurance Marketing and Research Association (LIMRA), is the primary reason 51% of American adults own a life policy.
Understanding how life insurance claims and settlements work can help you navigate the process.
What Is a Life Insurance Settlement?
A life insurance settlement refers to the money that comes from borrowing against, withdrawing from, or selling a life insurance policy. Some policies also offer extra settlement options through riders, called "amendments" or "endorsements." Riders are optional add-ons to standard life policies that provide additional benefits or customized coverage at an extra cost.
How Are Life Insurance Claims Paid Out?
During a standard life settlement process, an insurer pays out the death benefit to the beneficiary named by the insured or the "policyholder." The beneficiary can file a claim when the insured passes away.
The insurer then pays the beneficiary through:
- A one-time lump sum payment covering the entire death benefit
- Income installments over a specified period of time
- Structured payments through a retained asset account
Liquidating or monetizing insurance policy benefits while you're alive is also possible through the following ways.
Borrow Against the Policy
You can file a life insurance settlement claim by taking out a loan on the cash value accumulated by your policy. In this scenario, you'd have to repay the amount you borrowed, plus interest and other fees, to ensure your beneficiaries will receive the policy's original death benefit amount.
Withdraw a Portion of Your Life Insurance Policy Value
Another option is to withdraw a portion of your policy's accumulated cash value. If you take this route, you may not have to pay back the funds you took out. However, it will reduce the total death benefit amount that your beneficiaries will receive.
File a Rider Claim
You can also file a claim against existing riders you may have. An example is a critical illness rider. It provides a lump-sum payment if a licensed healthcare professional diagnoses you with a covered medical condition.
Many health problems are prevalent, with the U.S. CDC pointing out that an estimated 129 million people in the country have at least one chronic disease. Examples include:
- Heart disease
- Diabetes
- Obesity
- Hypertension
- Cancer
Having a critical illness rider can therefore be beneficial, particularly if you have a genetic predisposition.
Sell the Policy
Another viable option to maximize your life insurance policy is by selling it to a third-party life settlement provider or broker, such as Abacus Global Management, Coventry Direct, or Magna Life Settlements. The third party will purchase your policy and give you cash in exchange. Because you'll no longer own the policy, you'll stop paying premiums toward it, but you'll also no longer receive coverage.
How Can a Life Insurance Settlement Provide Value While You're Still Alive?
A life insurance settlement can provide value while you, the policyholder, are still alive by giving you quick access to funds. You can, for instance, use the money you get from your policy to:
- Make a down payment on a home you want to buy
- Finance your education or that of your kids (or grandkids)
- Supplement your retirement income
- Pay for unexpected expenses like hospitalization or medical bills
- Launch a business
- Start or expand your investment portfolio
- Go on a well-deserved holiday
The above are just some examples of what you can do; so long as it's legal and you need or desire it, you can use your policy's funds as you see fit.
Frequently Asked Questions
Do you pay taxes on life insurance payouts?
If the payout is through the traditional process (i.e., beneficiaries file a claim after the policyholder passes away), the life insurance policy's settlement amount is often not taxable.
Taxes may apply, however, if you sell or transfer it to another owner for cash or other valuables. Your beneficiaries may also have to pay tax if they choose to receive the death benefit in installments over time. In this case, taxes may apply to the interest that accrues on the unpaid balance of the policy.
Another situation wherein a life insurance policy's death benefit can be taxable is if you include it in your estate for tax purposes. If you name the estate as your beneficiary, the estate's total value, including the death benefit, could be subject to taxes.
Under what circumstances will life insurance not pay?
Life insurance providers may not pay out if the policy has lapsed (the policyholder stopped making premium payments). Another is if the policyholder lied or withheld crucial information on their application. Death from suicide or a criminal activity may also result in the insurer not paying the settlement.
Where else can beneficiaries use a life insurance payout?
Aside from burial and final expenses, beneficiaries may also use the death benefit payout they receive to pay outstanding bills that the policyholder may have left. Some examples are medical or hospital bills or a mortgage.
Beneficiaries can also use the funds as a means to cover ongoing financial responsibilities, such as day-to-day expenses that the policyholder used to shoulder. They can also use it the same way you would if you took a loan, withdrew against, or sold your policy for a life settlement.
Maximize Your Life Insurance Policy
By withdrawing from, borrowing against, or selling your policy, you can gain quick access to life insurance settlement funds while you're still alive. You can reap the financial benefits of life insurance by using the money for your own benefit and enjoying your life to the fullest.
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This article was prepared by an independent contributor and helps us continue to deliver quality news and information.