Most people look at life insurance as a "death benefit." It’s right there in the name. You pay a premium, you go about your life, and eventually, when you're gone, your family gets a check. It’s a grim transaction. But honestly? That's an outdated way of looking at it. There is a whole other side to these policies that lets you actually use the money while you're still walking around and breathing. We call these the living benefits of life insurance, and if you aren't using them, you're essentially leaving your own money on the table.
It’s weird to think about "using" your life insurance.
Usually, the only time we think about insurance is when something goes wrong. You crash the car. The basement floods. But life insurance—specifically permanent or universal policies—can function more like a specialized financial tool than just a safety net for your heirs. It’s about liquidity. It’s about having a "break glass in case of emergency" fund that isn't tied to the volatility of the stock market.
Why living benefits of life insurance are changing the game
Let’s be real: the cost of healthcare is terrifying. According to the American Journal of Public Health, medical debt is a leading cause of bankruptcy in the United States. This is where living benefits come in. These are "riders" or built-in features that allow you to access your death benefit early if you get a nasty diagnosis.
Think about a Critical Illness Rider.
If you have a heart attack, a stroke, or get diagnosed with invasive cancer, your policy might pay out a portion of the death benefit directly to you. This isn't a loan. It's your money. You can use it to pay for experimental treatments, fly in a specialist, or just pay your mortgage while you’re out of work. You're basically "accelerating" the payout.
Chronic illness and long-term care
Then there's the Chronic Illness Rider. This one is huge. If you can’t perform two out of the six "activities of daily living"—stuff like bathing, dressing, or eating—you can tap into the policy. With the cost of assisted living facilities skyrocketing (we're talking $5,000 to $10,000 a month in many states), having an insurance policy that pays for your care while you're alive is a literal lifesaver.
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It keeps you from draining your 401(k) or selling your house just to afford a nurse.
The "Bank Yourself" concept and cash value
When we talk about the living benefits of life insurance, we have to talk about Cash Value. This only applies to permanent policies like Whole Life or Universal Life. Term insurance doesn't do this. Term is like renting a house; permanent is like owning one and building equity.
Every time you pay a premium, a portion goes into a side account that grows over time.
- You can borrow against it.
- You can use it as collateral for a loan.
- You can withdraw it (up to the amount you paid in) tax-free.
Here is the nuance: when you take a loan from your life insurance policy, you aren't actually "withdrawing" your money. You’re borrowing from the insurance company, using your cash value as collateral. Because your money stays in the account, it continues to earn interest or dividends. It’s a bit of a "double dip." You’re using the money to, say, buy a car or invest in a business, while the original sum is still working for you inside the policy.
It’s a strategy used by wealthy families for generations. People like Walt Disney and J.C. Penney famously used the cash value in their life insurance policies to fund their businesses during lean years when banks wouldn't give them the time of day.
The tax-free retirement play
Most people are obsessed with the Roth IRA. Rightly so. Tax-free growth is the holy grail of investing. But life insurance offers a similar "tax-advantaged" bucket.
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If you structure a policy correctly—and this is key, you need an expert to do this so it doesn't become a "Modified Endowment Contract" or MEC—you can take "loans" from the policy during retirement. These loans aren't considered income by the IRS. So, you get a stream of cash that doesn't trigger a massive tax bill or hike up your Medicare premiums.
It’s a hedge against future tax hikes. If tax rates go up in ten or twenty years, your life insurance "income" remains unaffected.
Misconceptions that keep people broke
"Life insurance is a bad investment."
You've probably heard that from certain financial gurus. And if you’re looking for 12% annual returns, they’re right. Life insurance is not an "investment" in the traditional sense. It’s a volatility buffer. It’s a place to put cash where it's safe from market crashes. When the S&P 500 drops 20%, your cash value doesn't budge. In fact, many policies have a "floor" of 0%, meaning you can't lose money due to market performance.
Another myth? "Living benefits are too expensive."
In reality, many companies include basic accelerated death benefit riders for free or for a very nominal fee. The "cost" is usually a small reduction in the final death benefit if you actually end up using the money while you're alive. It’s a trade-off. Would you rather your kids get an extra $50,000 after you're gone, or would you rather have that $50,000 now to beat a terminal illness? Most people choose the latter.
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Practical steps to take right now
Audit your current policy. If you have a policy through work, it probably doesn't have these benefits. It’s usually "basic term." You need to look at your personal private policies. Check the "Table of Contents" for words like "Accelerated Death Benefit," "Terminal Illness," or "Cash Accumulation."
Talk to a specialist, not a generalist. Don't just call your car insurance guy. You need a life insurance professional who understands "Infinite Banking" or "LIRPs" (Life Insurance Retirement Plans). Ask them specifically: "What is my maximum loan value?" and "What riders do I have for chronic illness?"
Check the 'Ratings'. If you're going to use your life insurance as a personal bank, the company needs to be rock solid. Look for companies with A.M. Best ratings of A or higher. You want a company that has been paying dividends for 100+ years.
Mind the 'MEC'. If you try to dump too much money into a policy too fast to grow the cash value, the IRS will strip away the tax benefits. There’s a limit. Make sure your agent runs a "MEC test" on any policy you're considering.
Don't cancel your term yet. If you realize you want living benefits but only have term insurance, don't just drop your current coverage. See if your term policy is "convertible." Many policies allow you to swap your term for a permanent policy with living benefits without doing a new medical exam. This is a massive win if your health has declined since you first bought the policy.
Life insurance is a tool. Like any tool, it’s only as good as the person using it. If you treat it like a "set it and forget it" death benefit, that’s all it will ever be. But if you understand the living benefits of life insurance, you gain a level of financial flexibility that a standard savings account or a 401(k) simply cannot provide. It’s about control. It’s about having options when life gets messy. And honestly, having options is the closest thing to true financial freedom you can get.