Life insurance is typically viewed as a financial safety net for loved ones in the event of death. However, many people are unaware that certain life insurance policies can provide benefits while you’re still alive. Whether you need funds for long-term care, estate planning, or even a financial emergency, life insurance can serve as a valuable tool. In this article, we’ll explore five ways to access life insurance benefits while you’re still living, providing insight into how to use life insurance while alive in the UK.
1. Borrowing Against the Cash Value
One of the most common ways to use life insurance while alive is to borrow against the policy’s cash value. This is an option for those who have a whole life or universal life insurance policy, as these types of policies accumulate a cash value over time. As the policyholder, you can borrow money from the insurer, using your policy as collateral. The cash value grows on a tax-deferred basis, which means you don’t pay taxes on the accumulated interest unless you withdraw more than what you’ve paid in premiums.
The benefit of this option is that the loan does not require credit checks or lengthy approval processes, making it an accessible option in times of need. However, it’s important to remember that if the loan and interest are not repaid, the outstanding amount will be deducted from the death benefit when the policyholder passes away.
2. Life Insurance Settlements
A life insurance settlement, also known as a life settlement, is another option for accessing funds while you’re still alive. In a life settlement, the policyholder sells their life insurance policy to a third party in exchange for a lump sum that is less than the death benefit but more than the cash surrender value. This is often done by individuals who no longer need the policy or can no longer afford the premiums.
In the UK, life insurance settlements can provide financial relief for policyholders in need of immediate funds, whether for medical bills, living expenses, or other financial obligations. However, it’s important to be aware that selling a life insurance policy means that you relinquish your rights to the death benefit, and your beneficiaries will no longer receive a payout upon your passing.
3. Using the Policy for Long-Term Care
As people age, long-term care becomes a major concern, and the costs associated with it can be daunting. Some life insurance policies in the UK offer the option to use the policy’s value to cover long-term care costs. This can be done through a rider, which allows you to access part of the death benefit early if you meet certain conditions, such as being diagnosed with a chronic illness or requiring long-term care.
This feature is particularly useful for those who may not have specific long-term care insurance but still want to ensure that they have the funds to cover future medical or care-related expenses. Keep in mind, though, that accessing funds for long-term care will reduce the overall death benefit, leaving less for your beneficiaries.
4. Cash Surrender Value
If you no longer need your life insurance policy or can’t afford to keep paying the premiums, another option is to surrender the policy for its cash value. The cash surrender value is the amount you’ll receive if you decide to terminate your policy early. This can provide immediate funds if you’re in financial difficulty or simply no longer want to maintain the policy.
However, it’s important to consider that surrendering a policy ends the coverage entirely. Your beneficiaries will no longer be entitled to a death benefit, and you may have to pay taxes on the amount you receive if it exceeds the premiums you’ve paid into the policy.
5. Estate Planning and Tax Benefits
In the UK, life insurance can also play a significant role in estate planning, helping policyholders reduce the impact of inheritance tax on their beneficiaries. By placing a life insurance policy in a trust, the death benefit can be paid out without being subject to inheritance tax, which is currently 40% on estates over the nil-rate band.
Moreover, some life insurance policies with investment components, such as whole life insurance, allow you to accumulate wealth over time. You can use this accumulated cash value for various purposes during your lifetime, such as funding a retirement plan or setting up a legacy for your heirs. Life insurance policies in trusts are especially beneficial in this context, as they allow you to control how and when your beneficiaries receive the funds.
The Versatility of Life Insurance
Life insurance is more than just a financial safety net for your loved ones after you’re gone—it can also provide substantial benefits while you’re alive. From borrowing against the cash value to funding long-term care, UK policyholders have several ways to make use of life insurance while living.
If you’re considering how to use life insurance while alive in the UK, it’s crucial to understand the terms of your policy and the potential impact on your beneficiaries. Whether you’re planning for the future or dealing with a financial emergency, understanding the full scope of what life insurance can offer will help you make informed decisions.
Whether you’re thinking of borrowing against your policy, selling it in a life settlement, or using the funds for long-term care or estate planning, life insurance can be a versatile financial tool. It’s worth exploring your options to make the most of your policy while also ensuring that your loved ones are protected in the long run.
Make sure to consult with a financial advisor or life insurance expert to fully understand the implications of using your life insurance in these ways. Every policy is different, and what works for one person may not be the best option for another, so professional advice is always recommended before making any major financial decisions.