How to Make Money from Your Insurance Policy

Written by: David Scott

Table of Contents

    Preliminary Considerations Before Converting a Life Insurance Policy

    • Be aware of the many kinds of life insurance policies you have and the various alternatives you have for converting the policy into a source of income.
    • Consult with your policy administrator, a tax planning specialist, and/or someone who is experienced in life insurance plans and financial planning to determine your individual requirements and options.
    • Understand and identify all of the financial advantages and possible negative consequences of cashing out your life insurance policy.
    • Keep in mind the conversion can affect the amount you or your beneficiary receive from a life insurance policy. It may be reduced, or in certain cases can completely be nullified.

    Here are some popular strategies for transforming life insurance into a source of income:

    Take out a loan from your life insurance provider

    An insurance loan is one that is secured by the policyholder’s death benefit and is thus not expected to be repaid by the policyholder while he or she is still alive. If you have a permanent life insurance policy, you may be eligible for a tax-free loan from the insurance company regardless of health or financial issues. The life insurance policy specifies the amount you may borrow and the interest rate. You must keep paying premiums.

    Consider the following issues:

    • The loan must be returned with interest; otherwise, your beneficiaries’ death benefits would be decreased.
    • If your insurance policy enables loans, you should be able to complete a straightforward loan transaction using standard insurance company documents and get your money shortly.
    • When applying for this form of loan, your credit rating and other assets are not taken into account at all.
    • If you don’t pay the loan interest, your policy may lapse. Your policy will specify whether your loan interest rate is fixed or variable. Find out how much interest you’ll have to pay.

    Obtain a loan from a second- or third-party lender

    Even if your term life insurance policy or permanent life insurance policy does not allow loans, you may be able to utilize your life insurance policy as collateral for a loan from another lender. For example, a beneficiary or another third party may be ready to provide you a loan in exchange for repayment from the policy’s death benefit (as a beneficiary).

    Consider the following issues:

    • The loan amount and payback conditions must be agreed upon by both you and the specified beneficiary in your life insurance policy.
    • You will choose an irrevocable beneficiary (one who cannot be altered) or assign the insurance (legally transfer the policy to another person) to safeguard the beneficiary who will provide you the loan. You’ll also agree on premium payments so the lender knows the policy will be in force and won’t lapse.
    • If you do not hire an attorney to draft the loan agreement, consider having it reviewed by one before signing the deal.

    Accelerated/living benefits

    Accelerated benefits (also known as living benefits) are similar to cash advances and are available for both term and permanent life insurance plans. You can get money from your policy if you have a terminal illness with a life expectancy of two years or less, a specific disease, or an illness that requires long-term care. The amount of money paid out to the policyholder, as well as any relevant interest or fees, are subtracted from the amount of money paid out to the beneficiary when the policyholder dies. Accelerated benefits may potentially remove or lower premiums while retaining the status of your insurance policy.

    Consider the following issues:

    Using accelerated benefits has the advantage of ensuring that your beneficiary gets the money that was not already advanced to you. If, on the other hand, you decide to sell your insurance, your beneficiary will most likely not get any compensation.

    Sell life insurance policy (viatical and life settlements)

    Both term and permanent policyholders may make money by selling their life insurance policies (also known as viatical settlements or life settlements). To learn more about this alternative, speak with someone who has expertise valuing life insurance policies, such as a life settlement broker, the insurance company, or your insurance agent. Talk to a tax professional about how the following choices will affect your taxes.

    Transactions in which a person with a shorter life expectancy sells his or her life insurance policy at a price that is less than the policy’s death benefit but more than its cash surrender value are known as viatical settlements. The purchaser takes over responsibility for the payment of premiums and becomes the legal owner of the insurance. Life/senior settlements are comparable to viatical settlements, with the exception that the individual selling the insurance does not need to have a short life expectancy in order to sell the policy. Life settlements are particularly prevalent among elderly adults with degenerative health conditions. 

    If the insurance policy is to be sold, it must contain a clause that permits it to be assigned (the transfer of legal ownership to another person). Your type of insurance, age, health condition, insurer’s rating, premium rate, and death benefit all affect the amount of money you get in a life insurance policy settlement. Depending on your state’s insurance department, they may be able to provide you with contact information for licensed buyers and brokers of life insurance policies. Alternatively, you may contact the Life Insurance Settlement Association to get a list of their member companies and agents.

    Consider the following issues:

    • If you decide to sell an employer-provided coverage, the buyer will likely call your employer for more information. This implies that a coworker may become aware of your health condition.
    • The buyer (company or person who purchases the life insurance policy) becomes the policy’s owner and gets the policy’s face value upon death.
    • You will need to call many viatical or life settlements providers in order to learn about purchasing rules and the value of your policy. This may be done independently or via an insurance broker for a charge.

    Surrender and terminate the life insurance policy in exchange for cash

    If you have exhausted all other options for accessing funds from your life insurance policy, you may choose to surrender your policy and discontinue coverage. The policy’s cash surrender value will be paid out; available to holders of a permanent policy.In most cases, selling an insurance policy is more lucrative than this choice. Premium payments come to an end, and there are no designated beneficiaries. The excess of the settlement amount above the amount of insurance premiums paid is subject to taxation. In addition, you may be required to pay a surrender fee in order to terminate the insurance policy contract. If you can no longer afford the premiums, the insurance is no longer required, or you can’t sell it for more than the cash surrender value, this option may be a suitable choice for you.

    Consider the following issues:

    • Cash surrender value may be low if your coverage is relinquished shortly after purchase. 
    • You may be able to change your mind if you determine that canceling your insurance was not in your best interest. This decision must be made within three months after canceling your coverage. Check with your state’s insurance commission to learn more about the regulations in your jurisdiction.

    Life insurance policy donation

    As a last resort, you can consider giving the insurance to a qualifying non-profit, which may qualify you for a tax deduction on your federal income tax. Consult with a tax planning expert about your individual circumstances. Also consult with the charity of your choice, since not all can or will receive life insurance as a donation.

    Forewarning: Before you convert your life insurance policy into income

    Take into consideration the impact that this may have on your benefits and overall financial status. For instance, if you receive a government or state benefit based on your income, such as Supplemental Social Security Income or food stamps, the money you receive from converting your life insurance policy into cash may affect your eligibility for financial assistance programs or the amount you receive. 

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