Who is life insurance for? That is, who does it benefit? When asked that question, most people will likely say that it benefits your loved ones after you die. After all, the policy only pays out when you die, and you won’t have much use for those funds by that point, right?
Well, yes and no. Actually, life insurance can offer some lifetime benefits for the owner of the policy, which is typically the insured person. For example, the owner may be able to take out a loan against the value of the policy. Or he or she may be able to sell it in a transaction known as a life settlement (called a viatical settlement in some other states).
Let’s look at these two lifetime benefits more closely.
Background: The Two Types of Life Insurance
As background to the following discussion, we need to be clear on some terminology. Life insurance generally comes in two forms:
- Term life insurance is life insurance that lasts for a set period, and consists of only a life insurance component. Because it is “pure” life insurance, it is generally cheaper than whole life insurance or other forms of permanent insurance.
- Whole life insurance is a type of permanent life insurance. It provides coverage indefinitely—for as long as the premiums are paid. Whole life insurance includes an investment component. Part of the premiums paid on the policy are invested by the insurance company. Because of this extra component, it is generally more expensive than a term life policy.
The lifetime benefits that we’re looking at in this article are only available in certain whole life policies (or other types of permanent policies), not term life insurance.
Insurance Policy Loans
With some whole life policies, the owner can take out a loan against the policy. The terms of each specific policy will spell out when and how large a loan can be made.
One unique feature of these loans is that they don’t always require repayment during life. Instead, the insurance company can pay itself back by deducting what is owed from the policy proceeds when the insured dies.
That might sound like a good deal, but it could greatly reduce the proceeds available for the insured’s loved ones. So before taking out such a loan, you should investigate what other options might be available.
In a life settlement, the owner of a life insurance policy sells it to a licensed life settlement broker. In exchange for transferring ownership of the policy to the broker, the broker pays the owner an amount that is less than the face amount of the policy. Afterwards, the broker pays the premiums on the policy and will receive the policy proceeds when the insured dies.
Some policies provide for what is, in some ways, a built-in life settlement, called accelerated death benefits. The owner can receive an advance on the policy’s proceeds. But with accelerated benefits, unlike with a life settlement, the owner must still pay the premiums.
In some circumstances, the amounts paid under a life settlement or as accelerated death benefits are income-tax free. The Internal Revenue Code provides an exclusion for such amounts for some terminally or chronically ill individuals. But, in any event, you should consult your financial adviser and estate planning attorney before agreeing to any such transaction.
Should You Take Advantage of These Lifetime Benefits?
Unfortunately, this blog post can only scratch the surface of the considerations that go into obtaining a life insurance policy loan, life settlement, or accelerated death benefits. For example, I haven’t discussed how receiving those funds could impact eligibility for various forms of government assistance.
If you’d like to learn more about your options and how life insurance can fit into your overall estate plan, call, email, or visit me today!