Life insurance isn’t just about leaving a financial safety net for your loved ones when you’re gone. You can actually tap into some policies while you’re still living – and those “living benefits” can be a lifesaver during tough times.
Now, these living benefits come in various flavors, depending on the type of policy and riders. While not technically living benefits, some people even withdraw from their policy or take loans against the cash value. We’ll unpack all that as we go along.
Living Benefits Explained: How Does It Work?
Most of us think life insurance just helps our families *after* we’re gone, but with living benefits, your life insurance can step in and provide help when you need it *most* – like when dealing with serious illnesses, accidents, or disabilities.
Imagine this: you get diagnosed with a covered illness and need funds for treatment, or you have a debilitating accident and can’t work for a while. Living benefits can be a lifesaver by giving you access to some of your death benefit funds when you need it.
Sounds incredible, right? Keep in mind, this doesn’t mean you can use your death benefit like an ATM card. These living benefits usually come with some specific rules and conditions, which we’ll break down shortly.
Having these options are a powerful way to add extra financial protection to your life insurance policy.
Different Types of Life Insurance Living Benefits:
There are various types of living benefits to consider when looking into a life insurance policy. I’ve listed out the different benefit riders commonly available.
Accelerated Death Benefit Rider:
This is the a very common included life insurance policy rider in the world of living benefits. With an Accelerated Death Benefit rider, if you’re diagnosed with a terminal illness (think less than a year or two to live, depending on the policy’s definition), you can get a portion – or even all – of your policy’s death benefit while you’re still living.
This could make all the difference in making your final days as comfortable as possible or taking that dream vacation with your family they have always longed for. The Accelerated Death Benefit rider allows you to tap into your death benefit while you are alive and there is no requirement for the benefit to be repaid.
Think of it as accessing some of your death benefit now, so that you and your family can be taken care of. That way you get to make the most of your remaining time and focus on things that matter most.
Critical Illness Rider:
A Critical Illness rider focuses on giving you access to funds for specific serious illnesses – think major heart attacks, strokes, or even some forms of cancer, depending on the insurance policy.
You might already be wondering this but any amounts that are paid out as accelerated death benefits get subtracted from the overall death benefit amount that would have gone to your beneficiaries later.
Now, not every policy includes every critical illness. Make sure to talk to a professional because you need to review the specifics of the illnesses covered.
Chronic Illness Rider:
Here’s another extremely helpful benefit: a Chronic Illness Rider. This is for situations where you’re not terminally ill but suffer from a chronic condition that severely impacts your day-to-day life. Conditions that keep you from doing normal everyday things, such as cooking, bathing, getting dressed.
Many policies define chronic illness using six “Activities of Daily Living,” also known as ADLs, which usually guides your qualification for chronic illness rider benefits. Think of it as an insurance cushion that steps in to offer financial help when a chronic illness takes a toll on your life and independence.
Long-Term Care Rider:
Aging can be challenging and with the average person in their mid 60s and older likely needing some form of care, a Long-Term Care Rider can provide money when needed for these expenses. It lets you tap into some of those death benefit dollars to help cover the cost of nursing home stays or in-home care, should you require it as you get older. A Long-Term Care Rider helps to navigate those expenses.
Again, keep in mind: any amount you draw from the death benefit for this purpose will be subtracted from the eventual payout for your loved ones.
Confined Care Rider:
When it comes to living benefits, a confined care rider can provide valuable protection for you and your loved ones. This rider is designed to offer financial support if you require care in a nursing home or assisted living facility due to a chronic illness or disability.
Here are some key advantages of a confined care rider:
- It can help cover the costs of long-term care, which can be substantial and often not fully covered by traditional health insurance or Medicare.
- The benefits are typically paid directly to you, giving you the flexibility to choose the type of care that best suits your needs.
- You can receive benefits while still maintaining control over your other assets, such as your retirement savings or home.
When considering a confined care rider, it’s important to understand the specific terms and conditions of the policy. Some factors to consider include:
- The benefit amount and duration.
- The elimination period (the waiting period before benefits begin).
- The types of care covered (nursing home, assisted living, home care).
- Any exclusions or limitations.
For most people between the ages of 30 and 70, a confined care rider can provide peace of mind and financial security. The primary difference between a Confined Care Rider and a Long-Term Care or Chronic Illness Rider is that the Confined Care Rider does not provide benefits for in-home care
Cash Value: It’s Like a Secret Stash for the Future.
Now, let’s chat about cash value life insurance. This is generally tied to *permanent* life insurance. It is different than term life because you’re essentially paying for insurance AND getting a mini-savings account built in at the same time.
How this works for universal life policies – the insurance company invests a chunk of each premium payment. The funds go into a special interest-bearing account within the policy itself. The interest earnings can be fixed or tied to a market index.
For whole life insurance policies, this permanent coverage includes a cash value component that accrues either interest or dividends within the policy.
As that cash value builds up over time, you can access those funds if you need to. The money is available through either a cash withdrawal or a policy loan (described below).
Unlocking Cash Value Options:
With cash value life insurance, you typically get several options for tapping into that “secret stash” built within your policy.
Cash Value Withdrawal:
One of your choices is to do a simple cash value withdrawal. However, if the cash withdrawal is more than the premiums you’ve paid into the policy, it can have tax implications.
Withdrawing too much cash value might also impact your policy’s death benefit payout to your family later. Just something to keep in mind.
Policy Loan:
Another useful option is to borrow against your life insurance policy. The interest rates on policy loans are often better than you’d find for regular loans. Access to the cash value of permanent life insurance through a policy loan in most cases does not have tax implications.
Be aware, if you don’t repay the loan before you die, the unpaid balance can be subtracted from your beneficiaries’ final payout. You family would receive the balance of the death benefit free from income tax.
Surrendering Your Policy:
While not often the best approach, this option exists if things get rough. If you end up completely surrendering your policy, you can cash out the entire remaining value. But just be careful with this option, because it leaves you without any life insurance coverage for your family.
Term Life vs. Permanent Life for Living Benefits
Let’s compare living benefit options when comparing term life and permanent life insurance. While they each have advantages, choosing the right policy is a personal decision that considers your own situation. It really depends on what your goals and needs are.
Term Life: More Budget-Friendly Protection
A lot of people like term life because it gives coverage for a specific period – let’s say 10, 20, or 30 years – usually at more affordable prices. The premiums on term life insurance policies often tend to be lower than permanent policies with similar death benefit amounts, because coverage only lasts for the specified period.
Think of it as short-term peace of mind for specific obligations. Today, many insurance companies offer living benefit riders at no additional premium cost on some of their term life insurance policies. Mutual of Omaha’s Term Life Express and Foresters Strong Foundation Term policies are some examples.
Permanent Life: Lifelong Protection + Investment
Permanent life is an interesting twist because it’s like a “forever” life insurance plan, that doesn’t expire as long as those premium payments are kept current. One important detail about permanent life policies that sets them apart from term policies is the ability to build a cash value, acting sort of like an investment within the policy itself.
Also, you can expect to get living benefit riders (that accelerated death benefit, chronic or critical illness stuff). Although a bit more expensive, a permanent life policy has cash value, is designed for your entire life, and many include these living benefit riders at no additional cost.
Do I Really *Need* Living Benefits?
Many people out there, including families, probably could use this but don’t know about living benefits in a life insurance policy. It is a valid question. Living benefits may not always be a top priority, especially if you’re healthy, have limited income or good insurance, or a large savings account to tap into.
If an unexpected health event, disability or other needs for funds would put a financial strain on your family, living benefits become an important part of your future financial plan.
Factors to Think About:
Several questions to ask yourself when deciding whether living benefits in a life insurance policy would actually work for your situation:
- Do I have family medical history, genetic risks or anything that increases chances of facing critical or chronic health conditions?
- If a chronic illness or terminal condition crept up, do I have resources readily available to pay for unexpected medical or living expenses? Do I have enough to support dependents or even a spouse?
- Am I worried about having money later to pay for care for long-term illnesses? Especially with these costs going up, this is a big concern for families.
Imagine an illness hitting and you or a family member haven’t really planned or saved for the loss of income and additional bills. How would you be impacted given the impact of inflation of these expenses.
Ultimately, it comes down to your personal circumstances, budget, health concerns, risk tolerance and what gives you the most peace of mind.
Adding Living Benefits Riders:
You know those riders we chatted about? The accelerated death benefit, chronic illness, critical illness – those are often included at no cost for many insurance policies. But the availability and costs of riders can differ.
So be sure to compare policies and check if a certain living benefit rider requires an extra fee. Make sure you understand what’s included “in the box” so to speak before you commit. It all comes down to researching carefully.
Get Quotes and Talk to an Insurance Professional
Now, once you’ve decided to explore living benefit life insurance, a really good next step is to get multiple quotes from top-rated life insurance companies.
Compare their offerings, costs, coverage, and living benefit provisions side-by-side. Here are some companies you can get information on living benefits for both term and whole life insurance: Transamerica, Mutual Of Omaha, New York Life Insurance, Foresters Financial, F&G Life Insurance.
You can also talk to an independent licensed insurance agent like Vestisure who works with all of the aforementioned companies and many more. An independent agent will break down policy details in plain English, so you fully understand all policy provisions before deciding which benefits are right for your specific situation.
Conclusion
Although life insurance protects loved ones when we’re gone, with “living benefits” riders or “cash value”, your life insurance could help you out while you’re still here. What do you do if you get seriously ill and have no savings or limited retirement or can’t work?
Life insurance with living benefits can provide the cushion you and your family needs to overcome difficult events that impact your financial situation. Think it over, weigh those pros and cons, talk with a pro – get all the information you need to make the best decision for yourself and your family.
FAQs about living benefits
What is the difference between a living benefit and a death benefit?
A death benefit is a payout made to your beneficiaries after you die. A living benefit, as its name implies, gives the policyholder a portion of the death benefit under certain situations that typically include terminal illnesses, chronic illnesses or certain qualifying critical illnesses. In general, a living benefit doesn’t exist with a term policy – a rider has to be attached to access a death benefit.
Which of these is considered to be a living benefit option?
Some common examples of living benefit riders attached to policies include a Terminal Illness Rider (sometimes referred to as an Accelerated Death Benefit), a Critical Illness Rider, a Chronic Illness Rider, and even a Long-Term Care Rider.
What is life benefit?
You might see a rider offered with insurance companies known as a “Life Benefit.” It allows you access to the death benefit of a permanent life insurance policy during the lifetime of the insured under specific conditions that include diagnoses such as terminal illness.
Are living benefits taxable?
If living benefits are an Accelerated Death Benefit, the amount received is generally not taxed by the federal government. However, rules do vary by state and some specific states may have different taxation rules in place. You always need to speak with an advisor or professional for state and federal tax guidance.
