To pay for cancer treatment, you might need to consider using your life insurance policy as a source of income. This is a complex matter. Before you decide to make changes to your life insurance coverage, talk to your life insurance provider, a tax planning professional or someone knowledgeable about life insurance policies and financial planning.
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Talk with loved ones and close friends before making the decision. There may be other options, such as a personal loan or the sale of something you own. You can also find out about Federal and State Benefit Programs. For example, some programs help people obtain Health Care Assistance for Uninsured.
Your policy or certificate document will specify the type of policy and describe the options available for converting your life insurance into income. Here’s what you need to know:
Here are some common methods for converting life insurance into income:
When a loan is given against a life insurance policy, the lender usually expects to be repaid from the policy’s death benefit after the policy holder dies, and you would not typically be required to repay the loan during your lifetime.
If you have a Permanent life insurance policy, you may be able to obtain a tax-free loan through the insurance company with no questions asked about your health or finances. The amount you can borrow and the interest rate is specified in the life insurance policy. You must continue to pay premiums.
If you have a term life or permanent life insurance policy, but your policy does not allow loans, you may be able to use your life policy as security for a loan from other lenders. For example, a beneficiary or other third party may be willing to give you a loan with an agreement to be repaid from the policy’s death benefit (as a beneficiary).
Available for both Term and Permanent life insurance policies, accelerated benefits (or living benefits) are like cash advances. They allow you to receive money from your policy if you:
The amount of money paid out to the policy holder, plus any applicable interest or fee, is deducted from the amount that is paid to the beneficiary when the policy holder dies. Accelerated benefits could also eliminate or reduce your premiums while maintaining the policy status.
Selling a life insurance policy to obtain income (also known as viatical settlements or life settlements) is available for both Term and Permanent policy holder. To learn about this option, contact someone experienced in the valuation of a life insurance policy, such as a life settlement broker or possibly the insurance company or your insurance agent. Consult a tax expert about the effect that the following options will have on your tax situation.
Viatical settlements are transactions in which a person with a shortened life expectancy sells his or her life insurance policy at a lower price than the policy’s death benefit but greater than the cash surrender value. The purchaser takes over paying the premiums and becomes the owner of the policy.
Life settlements (also known as a senior settlements) are similar to viatical settlements, except that the person selling the policy does not need to have a limited life expectancy. Life settlements are most common for older individuals who have some kind of life-shortening health condition.
In order to be sold, the policy must include a provision that allows it to be assigned (legal ownership transferred from one person to another). The amount of money for a settlement for a life insurance policy depends on:
Your state insurance department may be able to send you contact information for licensed purchasers and brokers of life insurance policies. Or you can contact the Life Insurance Settlement Association for a list of their members.
If there are no other ways to access money from your life insurance policy, you may decide to surrender your policy and terminate coverage. You’ll receive the cash surrender value described in the policy. Available for Permanent policy holders.
This option usually brings less money than the sale of a policy. Premium payments end, and no beneficiaries are named. Taxes are paid on the amount of the settlement that exceeds the amount of premiums you paid the insurance company. You may also have to pay a surrender charge to end the insurance policy contract. Cash surrender may be a good option for you if:
As a last option, you might consider donating the policy to a qualified organization, which could result in an income tax deduction for you. Discuss your specific situation with a tax-planning professional. This can be a complicated and unlikely scenario. Also talk with your chosen charity, as not all charities can or will accept life insurance as donations.
Consider the effect that this may have on your benefits and financial situation. For example, 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 income could affect your ability to qualify for financial assistance programs or change the amount you receive.
If you need or want money now, the only way to determine which would work best for you is to examine each alternative and compare the numbers. Keep in mind that whatever you receive now will decrease or possibly eliminate the amount your beneficiary will receive later.
