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An uptick in extreme weather has upended the homeowners insurance market. Many Americans now face higher rates, coverage shortfalls, or canceled policies. Your life insurance could be a surprising source of funds to help you recover from a natural disaster.
Key Takeaways
- Whole life insurance includes a cash-value component you can borrow from to cover emergency or disaster costs.
- Some life insurance policies offer accelerated benefits, which let you get a payout if you’re seriously hurt in a natural disaster or other event.
- Talk to your insurance agent or financial advisor to see if your policy includes these features or if you can add them.
Accessing Cash Value
Whole life insurance is a type of permanent coverage that stays in place as long as you keep up with payments. It includes a cash-value component, a savings feature that grows over time. Part of your premium goes into this tax-deferred account, where it can earn interest and increase in value.
You can withdraw from this account once it’s accrued enough value (usually after two to five years), though doing so decreases your policy’s death benefit. If you tap the full amount, you’re effectively giving up coverage.
You can borrow against it for virtually any reason, including unexpected emergencies. So, if you’re cash-strapped following a natural disaster, you could use a life insurance loan to cover medical expenses, home repairs, home reconstruction, relocation costs, and more.
Understanding Life Insurance Loans
You can take out a life insurance loan without paying taxes on the loan or going through a credit check. These loans usually have lower interest rates than regular personal loans. Plus, there’s no strict deadline to pay them back.
In fact, you don’t have to repay the loan at all. However, this will reduce your death benefit and could incur taxes. And if the interest and balance on your life insurance loan exceeds the remaining cash value, you could lose your policy.
“If you already have a policy with cash value, you can request an illustration from the life insurance company to see the impact that borrowing money or taking a withdrawal would have on the policy,” said Anne Ward, National Association of Personal Financial Advisors (NAPFA) bureau member and founder and principal wealth manager of Wisdom Wealth Management.
If you don’t have whole or permanent life insurance, you may need to reapply to get cash-value coverage. Alternatively, many term life insurance policies can be converted to permanent policies.
Living Benefits
Some life insurance policies include accelerated or “living” benefits that let you use part of your death benefit while you’re still alive. But to qualify, you usually need to have a serious illness or injury, like a terminal diagnosis or significant disability. These benefits may help if a natural disaster leaves you severely hurt and unable to work.
Living benefits are more common among permanent life insurance, though some insurers have started to offer them with term life insurance, too. They’re typically sold as riders, meaning you’ll pay extra for the coverage. More than 150 companies currently offer some type of accelerated benefits, according to the Alabama Department of Insurance.
Warning
Tapping accelerated benefits usually reduces the money your beneficiary will receive upon your death.
Other Possible Safety Nets
These other features of top life insurance policies can provide financial relief after a natural disaster.
- Accidental death and dismemberment (AD&D) insurance: Sold as a standalone policy or life insurance add-on, this coverage pays out if you die or lose a limb as a result of a covered accident. Some AD&D policies cover natural-disaster-related incidents.
- Premium waivers: Available for term and whole life policies, this rider pauses your monthly policy payments if you’re injured and unable to work. The waiver stays in effect for the duration of your disability, giving you at least one less bill to worry about following a catastrophe.
- Return of premium: This term life insurance add-on allows you to recoup the policy’s base premiums if you outlive its duration. Those funds can prove invaluable if you’re under financial stress following a natural disaster.
Life insurance terms and riders vary, so review your policy’s fine print carefully to understand your coverage.
“Policyowners should, at a minimum, request an annual benefits statement and an in-force illustration to see how their policy is performing and a snapshot of its benefits,” said Bryan M. Kuderna, certified financial planner (CFP), author, and financial podcast host. “There may be a hidden asset they forgot or did not fully understand that is ready to be used when called upon.”
The Bottom Line
Extreme weather events have affected almost 40% of U.S. adults over the last two years. Your life insurance could be an overlooked source of financial help when recovering from a disaster. With whole life insurance, you may be able to borrow from or withdraw the policy’s cash value. Some policies include riders that pay out if you suffer a serious injury. But not all life insurance works the same way, so it’s important to read the fine print. A licensed insurance agent or financial professional can explain your options and help you make the most of your coverage.
