Updated 1/9/18

We all know the basics of life insurance: If you have insurance and you die, your beneficiary gets paid. But did you know that you, not your beneficiary, can actually get paid before you die? There are two ways to do it:

1. Cash value surrender

This is only an option for policies that actually build cash value. If your policy has built up cash value over time, you can likely “surrender” some or all of it and have a check sent to you.

Types of policies that can build cash value:

  • Whole life
  • Universal Life
  • Variable universal

If you own one of the types of life insurance policies above, chances are you get statements from the insurance company periodically. Look for a cash value amount on the statement. That’s the most you can surrender, or cash out, from your policy.

Depending on the type of policy you have and how much cash surrender value there is, the amount of your death benefit may be affected by a withdrawal. If that’s a concern to you, confirm with the insurer any impact on death benefit before taking action.

No cash value for term insurance

If you have a term insurance policy, there is no cash value. If you happen to cancel the policy, you’ll get a refund of any unused premium (minus fees) but then you’re also left without that coverage.

2. Accelerated death benefit

Here’s how it works: If you have life insurance and you are diagnosed with a terminal illness, the insurance company may pay you while you are still alive. The money can come in handy to pay for medical bills, loan debt, or final expenses. When the money is paid out, the policy is cancelled and you no longer have to pay the premiums.

A family member of mine exercised this option when he was diagnosed with terminal cancer. He wasn’t able pay the insurance premiums due to other expenses. Rather than cancel the policy outright, he was able to get a check for about 75% of the full death benefit and no longer had to pay to keep the policy active.

Some things to know about accelerated death benefit:

  • Insured person’s life expectancy needs to be two years or less and verified in writing by a doctor.
  • Amount paid out will be less than if the insured died while the policy is in force.
  • Each insurance company has it’s own process for handling accelerated benefits.
  • Once the amount is paid out, you cannot reverse your decision.

Not all life insurance policies are exactly alike, so check with your insurer. You should ask if your specific policy has an “accelerated death benefit”. If you sense any hesitancy from the person you’re talking to, ask them to double check with someone else or let you speak to a more senior representative. It will also be written in the original policy contract the insurer is required to provide.

Accelerated death benefit provisions are commonly included in both whole life and term policies. So, even if your policy has no cash value, it may allow for payout due to terminal illness.

The takeaway

It’s rarely good news when a life insurance pays money out. However, the key purpose for insurance is to help protect from unforeseen expenses, so you may as well take advantage of it if the need comes up. One option is to surrender some or all of the cash value of a whole life policy and keep your coverage in force. If you or someone you know comes down with a terminal illness, see if your/their policy has an accelerated death benefit may help ease financial worries.