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We believe your assets should do more than one job. That’s the core idea behind what we call The And Asset®: a financial tool that provides a death benefit for your family and a source of capital for you to use today. A properly designed permanent life insurance policy is the perfect example. It’s not a static product that sits on a shelf until you pass away. Instead, it’s a living, growing asset with a cash value component you can access for major life events, business investments, or supplemental retirement income. Understanding the strategy of using your life insurance while alive is key to making your money work more efficiently for you.
Yes, you absolutely can. Many people think of life insurance as something that only benefits your loved ones after you’re gone. While that’s true for basic term policies, it’s only half the story for permanent life insurance. A properly structured permanent policy is a dynamic financial tool you can use throughout your lifetime. This is what we refer to as an And Asset; it’s an asset that provides a death benefit and living benefits.
The ability to access your policy’s value while you're alive is one of its most powerful features. For entrepreneurs and investors, this isn't just a nice-to-have; it's a strategic advantage. Instead of letting your money sit idle in a low-yield account, you can put it to work for major life events, business opportunities, or unexpected emergencies. This transforms your policy from a simple safety net into a personal source of capital you control, without needing to fill out loan applications or depend on a bank's approval. Understanding how to use these living benefits is key to building long-term financial stability and flexibility. It’s about shifting your mindset from seeing life insurance as just an expense to recognizing it as a foundational asset in your wealth strategy.
When you pay the premium on a permanent life insurance policy, like whole life, your payment does two jobs. Part of it covers the cost of the insurance and funds the death benefit. The other part goes into a savings component called cash value. This cash value grows over time, and it typically does so on a tax-deferred basis. This means you don’t pay taxes on the gains as they accumulate.
Over the years, this cash value can become a significant asset. You can then borrow against it or make a withdrawal, often tax-free up to the amount you've paid in premiums (this is your policy's basis). It’s this steady, predictable growth that makes your policy a reliable financial resource you can tap into when you need it.
It’s important to know the difference between these two core components of your policy. The death benefit is the money paid to your beneficiaries when you pass away. It’s the reason most people initially buy life insurance: to protect their family’s financial future.
Living benefits, on the other hand, are features that allow you to access your policy’s value while you are still alive. These benefits are typically accessed in two main ways: through your policy's cash value or through special add-ons called riders. Using your living benefits will usually reduce the death benefit your heirs receive. This isn’t a bad thing; it’s simply a trade-off you make to address a financial need today. It’s about having the flexibility to decide how and when to use your asset.
There’s a lot of chatter online about using life insurance, and not all of it is accurate. One common myth is that it’s a magic money-creation system. You can't buy a policy today and immediately borrow more than you’ve put in. It takes time and consistent premiums for the cash value to grow into a usable amount. This is a long-term strategy, not a get-rich-quick scheme.
Another point of confusion is the type of policy. These living benefits are features of permanent life insurance, not term life. Term insurance is pure protection with no cash value component, so there’s nothing to borrow against or withdraw. Understanding these distinctions is the first step to using your policy effectively and intentionally.
One of the biggest misconceptions about permanent life insurance is that its value is only available after you pass away. In reality, a properly structured policy is a dynamic financial asset you can use throughout your lifetime. The cash value component opens up several avenues for accessing funds when you need them, whether for an investment opportunity, a major expense, or a financial buffer during a downturn. Think of it less like a locked box and more like a personal source of capital you control. This is a core principle behind using life insurance as a powerful financial tool.
Understanding how to tap into your policy's living benefits is key to making it a cornerstone of your wealth strategy. Each method has its own set of rules, benefits, and potential consequences for your policy's long-term performance and death benefit. For example, taking a loan might be ideal for funding a business venture, while using a rider could be critical during a health emergency. The right choice depends entirely on your specific financial situation and goals. Let's walk through the five primary ways you can access the value inside your policy while you're still living, so you can make an informed decision that aligns with your intentional life.
Taking a policy loan is one of the most common and flexible ways to use your cash value. When you take a loan, you aren't actually withdrawing money from your policy; instead, you're borrowing from the insurance company using your cash value as collateral. This is a critical distinction because your cash value can continue to grow uninterrupted. These loans often have favorable interest rates and don't require a credit check or lengthy approval process. You also have flexibility in how you pay it back. If you don't repay the loan, the outstanding balance plus any accrued interest will simply be deducted from the final death benefit paid to your beneficiaries.
Another way to access funds is by making a partial withdrawal, also known as a partial surrender. Unlike a loan, a withdrawal permanently reduces your policy's cash value and death benefit. The good news is that you can typically withdraw an amount up to your "basis" (the total amount you've paid in premiums) without paying income tax. This can be a straightforward way to get cash in hand for a specific need. However, it's important to remember that this is not a loan; you are permanently removing a portion of the policy's value, which can impact its long-term growth potential.
Surrendering your policy is the most final of all the options. This means you are terminating the contract with the insurance company entirely. In return, you receive the policy's cash surrender value, which is the accumulated cash value minus any outstanding loans and surrender fees. When you surrender your policy, you no longer have to pay premiums, but your beneficiaries will no longer receive a death benefit. Any gains you receive above your premium basis may also be subject to income tax. This move should be considered carefully, as it ends your life insurance coverage for good.
Many modern permanent life insurance policies come with optional features called riders, which can provide extra protection. Living benefit riders allow you to access a portion of your death benefit early if you experience a qualifying health event, such as a terminal, chronic, or critical illness. These riders essentially act as a financial safety net, providing you with funds to help cover medical bills or other expenses during a difficult time. Accessing these benefits will reduce the final death benefit, but for many, the ability to get financial support when it's needed most is invaluable.
A life settlement is the sale of your life insurance policy to a third-party investor for a one-time cash payment. The payment will be more than the policy's cash surrender value but less than its death benefit. The new owner takes over the premium payments and becomes the beneficiary. This option is generally considered a last resort for policyholders who can no longer afford their premiums and have a critical need for cash. It's a way to get some value from a policy you would otherwise have to surrender, but it means giving up control and the future benefit for your heirs.
Think of living benefit riders as built-in backup plans for your life insurance policy. While the primary purpose of life insurance is to provide a death benefit to your loved ones, these riders give you the option to access a portion of that benefit while you are still alive. They are designed to provide a financial safety net if you face a serious medical situation, such as a terminal, chronic, or critical illness.
These riders aren't a standard feature on every policy; they are add-ons that can be included when you first set up your coverage. For business owners and investors, a sudden health crisis can do more than create medical bills; it can threaten the stability of your entire financial world. Instead of being forced to sell assets or pull capital from your business at the wrong time, these riders allow you to use your policy’s own benefit to get through a difficult period. This flexibility is a key reason why many people see their life insurance as a comprehensive part of their financial foundation, not just a payout for their heirs.
A terminal illness rider allows you to accelerate, or receive early, a portion of your death benefit if you are diagnosed with a terminal condition. Typically, this means a physician has certified that you have a life expectancy of 12 to 24 months. This feature can provide immediate cash to help you manage medical treatments, get your affairs in order, or simply spend quality time with your family without financial stress. The funds are generally unrestricted, meaning you can use them for whatever you need most. It’s a way for your policy to provide living benefits when you and your family need them most.
If you are diagnosed with a chronic illness and can no longer perform two of the six "activities of daily living" (like eating, bathing, or dressing) without assistance, a chronic illness rider may allow you to access a portion of your death benefit. This rider is often used to help pay for long-term care services, whether at home or in a specialized facility. Facing a chronic condition can be financially draining, and this rider provides a source of funds specifically designed to ease that burden. It helps ensure you can get the care you need without having to deplete the other assets you’ve worked hard to build.
A critical illness rider provides a lump-sum payment from your death benefit if you are diagnosed with a specific medical condition listed in your policy. These often include major events like a heart attack, stroke, organ transplant, or an invasive cancer diagnosis. The money can be a lifeline, helping you cover medical bills your health insurance doesn't, replace lost income if you can't work, or pay for experimental treatments. Having access to these funds can reduce financial pressure, allowing you to focus completely on your recovery. It’s another way to use life insurance while you're alive to protect your financial well-being.
Similar to a chronic illness rider, a long-term care (LTC) rider is specifically designed to help cover the costs of long-term care services. As people live longer, the need for assistance with daily activities can become a reality, and the costs for in-home aides or nursing home stays can be substantial. An LTC rider allows you to use your death benefit to pay for these expenses, often on a monthly basis. This can be a more integrated way to plan for long-term care needs without having to purchase a separate, standalone LTC insurance policy, helping you protect your savings and your family’s financial future.
To use a living benefit rider, you first need a qualifying medical diagnosis from a physician. You’ll have to submit a claim to your insurance company along with the required medical documentation to prove your eligibility. The insurance company will review your claim to confirm that your condition meets the policy's specific definition for a terminal, chronic, or critical illness. Once approved, they will pay out the benefit according to the terms of your rider. It’s important to remember that any amount you take out will reduce the final death benefit paid to your beneficiaries, so it’s always a good idea to discuss your options with a financial professional.
One of the most powerful features of a permanent life insurance policy is its favorable tax treatment. But as with any financial tool, the rules matter. How you access your cash value determines the tax implications, so it’s crucial to understand the landscape before you make a move. This isn't just about saving money on taxes; it's about making your money work more efficiently for you over the long term. Knowing these distinctions can help you use your policy as the flexible financial asset it was designed to be, without creating an unexpected tax bill from the IRS. Let's break down what you need to know.
Think of your "basis" as the total amount of premiums you've paid into your policy. The IRS generally allows you to withdraw from your cash value up to this amount without paying any income tax. Why? Because it's considered a return of your own money, not a gain or profit. This is a foundational principle of using your policy's living benefits. You can access the capital you’ve contributed over the years without tax consequences, giving you a liquid source of funds for opportunities or emergencies. This first-in, first-out treatment makes withdrawals a simple and effective way to tap into your policy's value.
The tax-free ride ends once your withdrawals exceed your basis. Any amount you take out beyond the total premiums you've paid is considered a gain, and those gains are subject to ordinary income tax. For example, if you've paid $50,000 in premiums (your basis) and your cash value has grown to $70,000, you can withdraw the first $50,000 tax-free. If you then withdraw another $10,000, that amount would be considered taxable income for the year. It’s important to track your basis carefully so you know exactly where you stand before making a significant withdrawal.
A life insurance policy can be reclassified as a Modified Endowment Contract (MEC) if you fund it with too much premium too quickly, based on IRS limits. If your policy becomes an MEC, it loses some of its favorable tax advantages. Withdrawals and loans are treated differently, with gains being taxed first (a last-in, first-out system). This means any distribution is considered to come from earnings first, making it taxable. Properly structured life insurance policies are designed to avoid becoming MECs, which is why working with a professional who understands policy design is so important from the very beginning.
Taking a loan against your policy’s cash value is one of the most common ways to access funds, and for good reason: policy loans are generally not considered taxable income. You are borrowing money from the insurance company and using your cash value as collateral. You will owe interest on the loan, but you have flexibility in how you repay it. If you don't repay the loan, the outstanding balance plus any accrued interest will simply be deducted from the death benefit paid to your beneficiaries. This makes policy loans a powerful tool for accessing capital without triggering a taxable event.
Surrendering your policy means you are terminating the contract entirely in exchange for its cash surrender value. This move has significant tax implications. If the cash you receive is greater than your policy's basis (the premiums you've paid), the difference is taxable as ordinary income. For instance, if your basis is $100,000 and you receive a surrender value of $125,000, you will owe income tax on the $25,000 gain. Surrendering is often a last resort, as it ends your coverage and can create a tax liability you might have otherwise avoided.
Using your life insurance policy as a financial tool while you're alive is one of its most powerful features. It’s a core reason we advocate for The And Asset strategy. But like any tool, you need to know how to use it correctly. Accessing your cash value isn't a free-for-all; it comes with trade-offs that require careful thought. Making an impulsive decision without understanding the consequences can disrupt your long-term financial strategy and impact the legacy you plan to leave behind.
Being intentional means looking at the full picture, not just the immediate benefits. Before you take a policy loan or make a withdrawal, it’s critical to understand how that action affects your policy’s health, your tax situation, and your family’s future. The goal is to use your policy to create more opportunities and stability, not to accidentally undermine the foundation you’ve worked so hard to build. Let’s walk through the key considerations so you can make informed decisions that align with your overall wealth plan.
This is the most direct consequence of using your living benefits. Any money you access from your policy during your lifetime, whether through a loan or a withdrawal, will reduce the final death benefit paid out to your beneficiaries. If you have an outstanding policy loan when you pass away, the loan balance plus any accrued interest is subtracted from the payout. Similarly, a direct withdrawal permanently reduces both your cash value and the death benefit. This isn't necessarily a bad thing, but it is a trade-off you need to make consciously as part of your intentional living plan. It requires you to balance your present financial needs with the legacy you intend to leave for your family or business.
A life insurance policy is a contract that requires a certain level of funding to remain in force. If you take out too much cash value or let a large loan accumulate without paying premiums, you risk draining the policy to the point where it can no longer sustain itself. If the cash value drops to zero, the policy will lapse, and your coverage will end. This is a worst-case scenario, as you would lose the death benefit entirely and could even face a significant tax bill if the lapsed policy had a loan against it. Properly structuring your life insurance and managing any loans or withdrawals with professional guidance is key to preventing this.
When you take a loan against your policy’s cash value, it’s not free money. The insurance company charges interest on the amount you borrow. While the rates are often favorable compared to other lenders, it's still a cost you need to account for. You have the flexibility to pay the interest annually or let it accrue, but if you let it accrue, it will be added to your loan balance. This growing balance will continue to be deducted from your eventual death benefit. Managing loan interest is an important part of using your policy effectively, ensuring the loan serves its purpose without becoming an unmanaged drag on your policy's value.
Your life insurance policy is likely just one piece of your broader financial strategy. A decision to pull cash from your policy should be weighed against its impact on your other goals, like retirement, estate planning, or business succession. For example, if you were counting on the policy's death benefit to provide liquidity for estate taxes or to fund a buy-sell agreement, reducing that benefit could create problems down the road. Every financial move has ripple effects, so it’s important to consider how accessing your cash value fits into your complete plan for building wealth and protecting your assets over the long term.
When you make a permanent withdrawal from your policy, you’re not just reducing the death benefit; you’re also giving up the future growth on the money you took out. Your cash value grows in a tax-advantaged environment, and removing a portion of it means that capital is no longer working for you inside the policy. This is the opportunity cost. A policy loan can be a more efficient option, as the collateral for your loan (your cash value) may continue to earn dividends and interest as if it were never touched. Understanding the difference between a loan and a withdrawal is crucial for maximizing the long-term performance of your And Asset.
Think of your policy’s cash value not just as a safety net, but as a flexible financial tool you can use throughout your life. The decision to tap into your living benefits is a strategic one, driven by your personal goals and financial circumstances. It’s about leveraging an asset you’ve intentionally built to solve problems or seize opportunities. While the death benefit is a crucial component for your legacy, the living benefits are what provide you with control and options while you’re here. Here are some of the most common scenarios where accessing your policy’s cash value makes perfect sense.
Life is unpredictable. An unexpected job loss, a sudden home repair, or a medical bill can create immediate financial stress. Instead of turning to high-interest credit cards or selling off investments at the wrong time, your policy’s cash value can serve as your private emergency fund. Because you can access this capital through a policy loan, you get quick liquidity without a complicated approval process. This feature is unique to permanent life insurance policies, like whole life, which are designed to build cash value over time. Using your policy this way allows you to handle emergencies with stability, keeping the rest of your financial plan intact and moving forward.
For entrepreneurs and investors, opportunity often requires quick access to capital. Your policy’s cash value can act as a ready source of funding, allowing you to make strategic moves without liquidating other assets or seeking bank financing. You can use a policy loan to invest in real estate, expand your business, or buy into a new venture. This is a core principle of using your policy as The And Asset®; it’s not an either/or choice. Your money continues to work for you inside the policy even while you use it elsewhere. This gives you the power to act on opportunities that can build significant wealth over the long term.
As you approach retirement, having multiple income sources creates more security and flexibility. Your policy’s cash value can be used to create a stream of supplemental income, often with significant tax advantages. By structuring policy loans correctly, you can access funds to cover living expenses during retirement without it counting as taxable income. This can be a powerful way to manage your tax bracket and preserve other retirement accounts, like your 401(k) or IRA. It’s not about replacing those traditional accounts but adding another layer of financial control to your retirement planning, ensuring you can live the life you want without worrying about outliving your money.
The cost of healthcare, especially long-term care, can be one of the biggest threats to your wealth. Your life insurance policy can be a powerful tool to help cover these expenses. Many modern policies include living benefit riders, such as for chronic or critical illness, which allow you to accelerate a portion of your death benefit if you’re diagnosed with a qualifying condition. You can also use your policy’s cash value to pay for costs that health insurance may not cover, like in-home assistance or modifications to your home. Using your insurance this way helps protect your other assets from being drained by unexpected and expensive medical needs.
Using your living benefits is a balancing act. Every dollar you access through a loan or withdrawal will typically reduce the final death benefit paid to your beneficiaries. However, this can be a strategic part of your overall estate plan. For example, you might use the cash value to make financial gifts to your children or grandchildren while you’re still around to see them enjoy it. Or you could use it to pay premiums on other policies within an irrevocable life insurance trust (ILIT). It’s about using the full flexibility of your policy to achieve your goals for intentional living, both for yourself now and for your family in the future.
Accessing the cash value in your life insurance policy can be a powerful financial move, but it’s not a decision to take lightly. Before you tap into your policy’s living benefits, it’s smart to pause and think through the implications for your long-term financial picture. This isn’t about creating roadblocks; it’s about making sure you’re using this incredible asset with intention.
Think of it like a pre-flight checklist. By walking through these five steps, you can feel confident that you’re making a strategic choice that aligns with your goals, both for today and for the future you’re building. This process helps you move from simply having an option to using it wisely as part of your overall wealth strategy.
First things first, you need to know exactly what your policy allows. The ability to access funds while you're alive is a feature of permanent life insurance, like a whole life policy, not term insurance. Pull out your policy documents and get familiar with the specifics. Look for the rules around policy loans, withdrawals, and any living benefit riders you might have. How is interest calculated on loans? Are there fees for withdrawals? Understanding the fine print is the only way to know what tools you actually have at your disposal. If the language is confusing, your financial professional can help translate it into plain English.
Get crystal clear on why you need the money and exactly how much you need. Living benefits are designed to help you handle significant financial events, whether it’s a medical emergency or a can’t-miss business opportunity. Before you make a move, define the need. Are you covering unexpected medical bills? Seeding a new investment? Calculate the precise amount required. Taking out more than you need can unnecessarily reduce your death benefit and may slow your policy's long-term growth. This is a key part of what we call intentional living; every financial decision should have a clear purpose.
Using your policy’s living benefits is a trade-off. Any money you take out, whether through a loan, withdrawal, or rider, will almost always reduce the death benefit that you leave behind for your loved ones. This doesn’t mean you shouldn’t do it, but you need to weigh the immediate need against your long-term legacy goals. Have a conversation with your spouse or family if necessary. Ensuring your financial security today is important, and so is protecting the financial future of those you care about. The goal is to find the right balance between the two.
Your life insurance policy is a powerful source of capital, but it might not be your only one. Before taking a policy loan or withdrawal, take a quick inventory of your other financial resources. Do you have funds in an emergency savings account? Access to a home equity line of credit (HELOC) or a business line of credit? Compare the interest rates, repayment terms, and long-term consequences of each option. A policy loan might offer a competitive rate, but another option might leave your death benefit untouched. Your And Asset is a foundational piece of your wealth, so you want to use it strategically.
You don’t have to make this decision alone. A financial professional who understands the complexities of high-cash-value life insurance can be an invaluable guide. They can help you model how a loan or withdrawal will affect your policy’s performance over time and what it will mean for your death benefit. This conversation helps you see how using your policy fits into your complete financial plan. At BetterWealth, we help our clients think through these scenarios to ensure every choice supports their vision for a life of certainty and confidence.
What's the real difference between taking a loan and making a withdrawal? Think of it this way: a policy loan is like borrowing against your asset, while a withdrawal is like selling a piece of it. When you take a loan, you are borrowing from the insurance company and using your cash value as collateral. This is powerful because your cash value can continue to grow and earn dividends. A withdrawal, on the other hand, permanently reduces your policy's cash value and death benefit. While withdrawals up to your premium basis are typically tax-free, they also reduce the capital working for you inside the policy.
How soon can I start using the cash value in my policy? This is a long-term strategy, so it’s important to set the right expectations. You won't be able to borrow a significant amount of money right after making your first premium payment. It takes time and consistent funding for the cash value to grow into a substantial, usable asset. The exact timeline depends on your policy's specific design, but you should plan on it taking several years before the cash value becomes a meaningful source of capital.
Does taking a policy loan affect my credit score? No, it does not. A policy loan is a private transaction between you and the insurance company. It does not require a credit check, nor is it reported to any of the credit bureaus. This privacy and simplicity are major advantages, especially for entrepreneurs and investors who may want to keep their personal and business credit lines separate and unencumbered.
What happens if I don't pay back my policy loan? You have complete flexibility. Unlike a traditional bank loan, there are no required monthly payments. If you choose not to repay the loan, the outstanding balance, along with any accrued interest, will simply be deducted from the final death benefit paid to your beneficiaries. This allows you to access capital without the pressure of a rigid repayment schedule, but it's a trade-off you should make intentionally, as it will impact the legacy you leave behind.
Why would I use a policy loan instead of another source of financing, like a HELOC? The primary reasons are control, privacy, and efficiency. A policy loan doesn't require you to fill out lengthy applications, get approved by a bank, or put your home on the line. It's a private contract. More importantly, when you borrow against your policy, the cash value used as collateral can continue to grow uninterrupted. This is a key feature of The And Asset; your money can be at work in two places at once, which is something a home equity line of credit simply can't offer.
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