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Claiming Life Insurance While You're Alive

Last updated: 21/11/2022 | Estimated Reading Time: 10 minutes

Most life insurance policies won’t allow you to make a claim while you’re still alive. This is because life insurance is designed to support your family after your death. However, there are certain situations where you might be able to make a claim before your death. These include being diagnosed with a terminal illness or suffering a severe accident that prevents you from working.

Ultimately, your ability to claim life insurance while you’re alive will depend on the policy you have taken out. This is why it’s so important to make sure your life insurance policy aligns with your needs before making a commitment.

But which types of life insurance will allow you to cash in before your death and which one is best?

This guide will help you to develop a deeper understanding of how life insurance works and all the different ways you may be able to use your policy while you’re alive.

In This Guide:

How does life insurance work?

Traditional life insurance policies work by paying out a lump sum of money to your family when you die. There are two main types of life insurance that your policy is likely to fall into:

Term Life Insurance: With this type of policy, you’ll be covered for a specific period of time, whether that’s a decade or even longer. If you die within the agreed-upon window, your insurance should pay out. Term life insurance policies are usually a more affordable option, particularly if the term is short or decreasing.

Permanent Life Insurance: To make sure you’re always covered throughout your entire life, you will need permanent or whole life insurance. This type of policy doesn’t have an expiration date and will pay out no matter when you die. It’s usually more expensive than term life insurance, but it does have a cash value that will continue to grow as you pay your monthly premiums.

Can you cash in a life insurance policy before death?

It is possible to get money from your life insurance policy while you’re alive, but you must have the right kind of cover. Some life insurance policies will only pay out if you’re severely ill, while others may allow you to cash in a lump sum for any number of reasons. However, many life insurance policies will only pay out after your death, so make sure you read your policy documents carefully.

Cashing in life insurance due to an illness or accident

Accidents and illnesses are one of the most common reasons people want to make a claim on their life insurance. If you are unable to work and financially support your family due to your declining health or a recent disability, the following types of life insurance will make it possible to access your money while you’re alive.

  • Accelerated death benefit: Also referred to as terminal illness cover, accelerated death benefit is something that many life insurance policies include or offer as an add-on. It means that if you are diagnosed with a terminal illness, you will be able to access a certain sum of money to help you pay for end-of-life care and provide for your family.
  • Critical illness insurance: Similarly to the accelerated death benefit, critical illness insurance will allow you to use some of your life insurance money while you’re alive. However, instead of terminal illnesses, critical illness cover mainly includes conditions like heart attacks, cancer, organ failure, blindness and Parkinson’s disease.
  • Personal accident cover: If an injury or accident prevents you from working or results in a long-term disability, personal accident cover will pay out to help you cover any associated expenses and your living costs.

Cashing in life insurance for any other reason

Life can be unpredictable and sometimes you may need a lump sum of money for a reason that’s unrelated to your health. However, your life insurance policy won’t pay out in the same way it would for a terminal illness if you simply need money to carry out essential home repairs.

If you have term life insurance coverage, you won’t be able to cash in your policy for any other reason than the ones outlined in your policy documents. This is because the monthly payments you make do not provide cash value growth. You’re essentially paying for life insurance as a temporary service, not using it as an investment.

A permanent life insurance policy, or universal life insurance, usually does have a cash value, which means it can be borrowed against or even sold. This is because the monthly payments you make not only cover your policy premiums, but they are also used to grow the value of your life insurance.

How to use life insurance while alive in the UK

If you would like to use the money in your permanent life insurance policy while you’re alive, there are several options available to you. However, before you proceed, it’s important to note that the following actions could reduce the cash value of your life insurance and may impact your final payout. Always speak to your insurance company before withdrawing money or taking out a loan to find out how your life insurance policy could be affected.

Withdraw from your life insurance

Since permanent life insurance policies have a cash value, you might be able to withdraw money from the total value you have built up. Most of the time, this money will be tax-free, but if you withdraw an amount that’s greater than the amount you have paid in, you may have to pay income taxes. This is because withdrawing the amount you have paid in premiums is seen almost as a refund of your own money, but if you want to withdraw any interest or dividends your policy has produced, this will be classed as income.

Not every permanent life insurance policy will gain interest, but some will pay out dividends on a regular basis. However, these dividends aren’t always the same amount and may be less than expected. It’s important not to see dividends as a form of expected income, but rather as an added bonus of the life insurance policy you take out.

Surrender your life insurance

If you want to withdraw the full cash value of your life policy, your cover will be automatically cancelled. This is also known as surrendering your life insurance. Choosing this route will mean you will no longer be able to claim the death benefit your policy offered, leaving you unprotected unless you take out a new policy. 

Surrendering a life insurance policy may also come with fees and income tax charges. Many life insurance companies will also require you to pay any remaining premiums that you owe. This means that your accumulated cash may be much less than you expected.

Borrow against your life insurance

Depending on how much your life insurance policy is worth, lenders may be willing to give you a loan against its cash value. Typically, lenders don’t require a credit check for this type of loan, so if you have been rejected for other kinds of personal loans due to poor credit, this could be a viable option for you.

However, if you were to die before paying off your outstanding loan, any money you owe would be subtracted from the death benefit, meaning your family could get less money. Remember, like most loans, you will also incur interest, which could result in the final sum you owe being much greater than the initial amount you took out.

Is cashing in your life insurance a good idea?

Cashing in a life insurance policy isn’t for everyone, but it can be a welcome financial safety net during challenging times. Factors that may influence your decision to cash in your life insurance policy include:

  • Financial situation: If your current financial needs outweigh your longer-term goals, withdrawing from or surrendering your life insurance policy could be the right solution. Consider how a reduced death benefit may impact your family in the future and whether your present plans for the money, such as paying off your mortgage, could mitigate some of these risks.
  • Life expectancy: Many people decide to withdraw from their life insurance policy at an older age or in retirement. This is because they may no longer require such a large sum of money to support their family should they pass away.
  • Credit score: Having a poor credit score may prevent you from taking out a loan or even applying for a credit card. If you need money to cover expenses and have no other way of doing so, your life insurance could be the safety net you need.
  • Cash value: The greater the cash value of your life insurance, the easier it is to withdraw a percentage of it without impacting the death benefit too much.

Alternatives to cashing in your life insurance

Life insurance is usually taken out by people who want to make sure their families are supported once they die. If you’re more concerned with building wealth and maintaining your current lifestyle, you may want to consider taking out a different type of cover.

For example, income protection insurance or unemployment cover could help you to continue supporting your family if you were to lose your job or become too ill to work. Some policies will pay you a regular income to match the salary you had before, while others will pay you a lump sum or make payments on your mortgage for you.

Alternatively, if you’re worried about your income in retirement, you may benefit from paying into a pension or investment account. These can help you to enjoy a better quality of life as you age, whereas life insurance will usually only pay out when you die or are affected by a serious illness.

Finding a life insurance policy you can use before death

If you’re looking to buy life insurance for the first time or change the policy you currently have, our qualified brokers can provide the insight you need to make the best decision possible. Whether you’re hoping to find life insurance with critical illness cover or want to explore dividend-paying policies in further detail, our comparison service makes it easy to narrow down your choices.

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