1. You Can Use It to Secure a Business Loan or Startup Funding
Many startup founders and small business owners don’t realize that they may be able to use a life insurance policy to support a business loan. Certain permanent life insurance policies, such as whole life or universal life, build cash value over time. You may be able to use this cash value as collateral for a loan from a bank or financial institution.
The lender is not required to accept the policy and will still apply its own approval requirements.
If the loan isn’t repaid before death, the lender may deduct the outstanding balance from the policy’s death benefit. This would leave a smaller payout for your beneficiaries.
2. Cash Value Can Be Used for Emergency Funds
If you have a permanent life insurance policy, it may accumulate cash value as you pay premiums. Depending on the policy, you may be able to borrow from or withdraw some of that value while you’re still alive.
If you hit a rough financial patch due to unexpected bills, job loss or a major home repair, the policy’s cash value may provide another source of funds.
Interest is charged on a policy loan. If you don’t repay it, the balance may reduce the cash value and death benefit or cause the policy to lapse. A loan or withdrawal may also have tax consequences.
3. It Can Help Pay for Long-Term Care or Chronic Illness
Some permanent life insurance policies offer living benefits or optional riders. These may allow you to receive a payment if you’re diagnosed with a covered critical, chronic or terminal illness.
Depending on the policy, the money could help pay for in-home support, long-term care, medical treatment, therapy or rehabilitation.
These benefits are not automatically included with life insurance. The illness must meet the policy’s definition, and waiting or survival periods may apply. An accelerated benefit may also reduce the amount later paid to your beneficiaries.
Read More: See Whether Critical Illness Insurance Is Worth It
4. It Can Support Intergenerational Wealth Transfers
One of life insurance’s less obvious features is its ability to support planning for future generations. While many policyholders use life insurance to support a spouse or children, beneficiaries may also include grandchildren or other family members.
With proper planning, you may be able to:
- name more than one beneficiary;
- assign different percentages of the benefit to different beneficiaries; or
- arrange for a trust to manage money intended for a minor or another beneficiary.
Because the death benefit is generally received tax-free by a beneficiary, it may help provide money without requiring other family assets to be sold.
Beneficiary and trust arrangements can have legal and tax consequences. Review them with an estate-planning professional.
5. It May Help Avoid Probate Delays
Probate is the legal process used to confirm an estate representative’s authority and administer estate assets after death.
When a valid beneficiary other than the estate is named, the life insurance benefit is generally paid directly to that beneficiary rather than becoming part of the estate. If the estate is named or the beneficiary designation fails, the money may become part of the estate.
The insurer must still receive and assess a valid claim. Missing information, competing claims, an investigation or a minor beneficiary may delay payment.
Once paid, beneficiaries may use the money for final expenses, debts or everyday costs while the estate is being settled.
Review your primary and contingent beneficiaries regularly, particularly after a marriage, divorce, birth or death.