Life insurance is often seen as a safety net for loved ones after death, but many people don’t realise that certain policies allow you to access benefits while you’re still alive. This concept, known as “living benefits,” can provide UK residents with financial flexibility, whether to cover medical expenses, plan for retirement, or even fund personal projects.
What Are Living Benefits?
Living benefits refer to the financial options within some life insurance policies that allow policyholders to access part of the death benefit or cash value while they are still living. This feature is typically found in whole life and universal life policies, where a portion of the premiums is invested, enabling the policy to build a cash value over time.
Living benefits can be incredibly useful in a variety of situations, such as funding long-term care, covering medical expenses, or even providing a supplementary income in retirement. Understanding the potential of living benefits can help you make the most of your life insurance policy while addressing immediate financial needs.
1. Borrowing Against the Cash Value
One of the most accessible ways to use life insurance while alive in the UK is by borrowing against the policy’s cash value. Whole life insurance policies accumulate cash value over time, which policyholders can borrow against, often with relatively low interest rates. This option allows you to tap into the policy for personal use, such as paying off debts, covering unexpected medical bills, or funding a personal project.
Unlike traditional loans, borrowing against your life insurance policy does not require credit checks or approval from lenders. However, it’s important to note that if the loan is not repaid, it will reduce the death benefit paid out to your beneficiaries. This option provides financial flexibility while ensuring you maintain your policy’s long-term benefits.
2. Using Life Insurance for Medical Expenses
Medical expenses can be a significant financial burden, especially in later life. Some life insurance policies offer critical illness or terminal illness riders that allow you to access a portion of the death benefit early if diagnosed with a qualifying illness. This is particularly useful for covering costly treatments, medications, or long-term care that might not be fully covered by the NHS or private health insurance.
For UK residents, this feature can offer much-needed financial relief during difficult times. It’s important to review your life insurance policy to understand the specific terms related to critical illness coverage and ensure it meets your needs.
3. Funding Retirement with Life Insurance
In addition to providing protection for your loved ones, whole life insurance can also play a role in retirement planning. As policies build cash value, this amount can be accessed as a tax-efficient source of income during retirement. By cashing out part of the accumulated value or taking out a policy loan, you can supplement your pension or other retirement savings without the need to sell assets or draw down on investments.
Using life insurance as a financial tool during retirement can be particularly helpful for individuals looking to diversify their income streams. However, as with borrowing against the policy, any withdrawals or loans will reduce the death benefit left to your beneficiaries, so it’s important to consider the long-term implications.
4. Estate Planning and Tax Efficiency
For many UK residents, life insurance can also play a crucial role in estate planning. By placing your life insurance policy in a trust, you can ensure that the death benefit is paid out to your beneficiaries free from inheritance tax. This is especially important given that the UK inheritance tax threshold is currently £325,000, with anything above this being taxed at 40%.
Whole life insurance policies are ideal for estate planning, as they provide guaranteed payouts that can help cover potential tax liabilities. By placing the policy in trust, you can protect your beneficiaries from significant tax burdens while still accessing the cash value during your lifetime if needed.
5. Cashing Out the Policy
If you find that you no longer need your life insurance policy or cannot afford the premiums, another option is to cash it out entirely. The cash surrender value of a whole life or universal life insurance policy is the amount you would receive if you terminated the policy early. While this provides immediate access to funds, it also means that your beneficiaries will no longer receive a death benefit.
Cashing out a policy can be an attractive option for those facing financial difficulties or those who no longer need the protection life insurance offers. However, it’s crucial to carefully weigh this decision, as it comes with permanent consequences. You may also be liable to pay taxes on the amount you receive if it exceeds the total premiums you’ve paid into the policy.
Make Life Insurance Work for You
Life insurance is often thought of as a benefit for others, but with the right approach, it can also provide valuable financial resources during your lifetime. Whether you’re looking to cover medical expenses, supplement your retirement, or ensure tax efficiency in estate planning, understanding how to use life insurance while alive in the UK opens up a range of possibilities.
If you’re unsure about how to best utilise your policy’s living benefits, consulting with a financial advisor is a great first step. They can help you understand the specific features of your policy and guide you in making informed decisions that support your financial goals while protecting your beneficiaries. Make the most of your life insurance while you’re still here, and ensure that it benefits you as well as those you leave behind.
By taking advantage of the living benefits available through your life insurance policy, you can create financial flexibility and security for both now and the future.
