People mostly think about life insurance as a source of income when someone dies, but they forget that many insurance policies also can be a source of cash at other times.
If you have a life insurance policy with built-up cash value, you can borrow against that money and either repay the loan with interest or reduce the death benefit accordingly. Example: If you have a $100,000 life insurance policy but you owe $20,000 on a loan from that policy, your heirs would receive $80,000 as the insurance payout.
There are other options reserved for people who have been diagnosed with a terminal illness and have run out of other ways to pay their expenses. One example is a life insurance policy that can pay “accelerated death benefits” to an eligible policy holder — generally up to about 50 percent of the face value of the policy — in either a lump-sum payment or monthly payments that are deducted from the policy’s face value. When the policy holder dies, the rest of the death benefit is paid out.
Another possibility is to “sell” your life insurance policy to obtain a lump-sum of about 40 to 80 percent of the face value in exchange for the right to receive the full insurance payout when you die. This is known in the insurance business as a “viatical settlement.”
These and other options for tapping life insurance policies can be complicated (including tax and other implications), and they are not right for everyone. Consider getting guidance from your state government’s insurance regulator (listed in your local phone book or on the Web site of the National Association of Insurance Commissioners.