Life insurance typically ensures financial protection for loved ones upon the policyholder’s death. However, specific policies offer living benefits that provide additional financial security during the policyholder’s lifetime, albeit at a cost.
While many purchase life insurance to safeguard their family’s finances after their passing, some policies also provide benefits while the insured is alive. With life insurance featuring living benefits, policyholders may access a portion of their death benefit if they face illness or utilize the policy’s cash value to supplement their income.
What are life insurance living benefits?
Life insurance living benefits encompass features designed to offer financial security while you’re still alive. There are two primary types of living benefits found in life insurance:
- Policy riders: These provisions can be added to your policy to enhance its coverage. Specific riders allow you to access a portion of the policy’s death benefit under specific circumstances, such as upon diagnosis of a severe illness or the need for long-term care.
- Cash value life insurance: Permanent life insurance policies include a savings component known as cash value, which accumulates over time. Policyholders can often borrow against or withdraw from this cash value. Many people use the cash value to supplement their retirement income.
While life insurance living benefits can provide added financial security during illness or a need for supplementary income, one drawback is that utilizing these benefits can reduce the policy’s death benefit intended for your beneficiaries.
Living Benefits Riders in Life Insurance
A living benefits rider is an additional feature offered in a life insurance policy that provides benefits under specific circumstances, such as chronic illness, disability, or end-of-life care.
While most living benefits riders require an additional premium, some may be automatically included depending on the insurer and policy. Reviewing older policies is vital as insurers may have included these riders over time.
Common types of living benefits riders include:
- Accelerated Death Benefit Rider: This rider pays out a portion or all of the death benefit if the insured is diagnosed with a severe illness. However, it reduces the amount available for beneficiaries upon death. Eligibility criteria vary among insurers, often requiring a terminal illness diagnosis with a life expectancy typically under 24 months.
- Critical Illness and Chronic Illness Riders: These riders provide benefits upon diagnosis of specific severe illnesses like heart attack, stroke, cancer, or chronic conditions, potentially triggering a payout similar to an accelerated death benefit rider.
- Long-Term Care Rider: This rider pays a portion of the death benefit if the insured needs long-term care that is not covered by traditional health insurance. Payouts can be made in a lump sum or monthly form, with a typical waiting period before benefits can be accessed.
- Return-of-Premium Rider: This rider refunds some or all of the premiums paid if the insured outlives the policy term. It’s among the more expensive options and typically offers no refund if the policy is canceled before expiration.
- Waiver of Premium Rider: If the insured becomes disabled and unable to work, this rider allows them to stop paying premiums while keeping the policy active. There’s usually a waiting period before benefits begin, during which premiums paid may be reimbursed upon approval.
These riders enhance the flexibility and utility of life insurance policies, providing policyholders with financial security in various challenging circumstances.
Cash Value as a Living Benefit
When you purchase permanent life insurance, your premium is divided between the cost of life insurance coverage and the cash value component. Cash value life insurance allows you to take out a policy loan, withdraw, or surrender the policy. Some policyholders use their cash value to pay premiums or buy additional coverage, known as paid-up additions. Typically, withdrawals and loans from cash value are tax-free up to the premiums paid.
Cash value can be a valuable financial resource for retirees managing a fixed income. However, accessing cash value through withdrawals or loans generally reduces your policy’s death benefit.
How to Obtain Life Insurance with Living Benefits
Consider whether you require living benefits when shopping for a life insurance policy. Riders cannot usually be added to an existing policy, so carefully review your contract to determine if any living benefit riders are automatically included and understand their terms. Discuss the cost of additional living benefit riders with your life insurance agent or broker.
Additionally, factor in your desire for living benefits when choosing the type of life insurance policy. Term life policies only provide a death benefit and do not accumulate cash value. Any living benefits associated with term life insurance would typically be through a policy rider. For access to cash value, consider purchasing a permanent life insurance policy such as whole life or universal life.
Cost of Life Insurance with Living Benefits
The cost of life insurance with living benefits can vary significantly. For instance, some insurers automatically include certain living benefit riders, such as an accelerated death benefit or waiver of premium, which can increase premiums by up to 25%.
On the other hand, other living benefit riders can be considerably more expensive. For example, purchasing term life insurance with a return of premium rider often costs approximately five times more than a standard policy.
Additionally, permanent life insurance policies that accrue cash value are substantially pricier than term life policies, offering a comparable death benefit. For instance, Quotacy estimates that premiums for a $250,000 policy for a 35-year-old man in excellent health could be between seven to 14 times higher with permanent life insurance compared to a 30-year term policy.
Two Primary Types of Life Insurance with Different Benefits and Features
Life insurance offers two main types of coverage: term life insurance and permanent life insurance. Term life insurance provides cost-effective protection for a specified duration. However, once the term ends (typically 10 to 30 years), the coverage and potential benefits cease, as term policies do not accumulate cash value.
Permanent life insurance, in contrast, remains active throughout your lifetime as long as premiums are paid. These policies offer additional benefits, including cash value accumulation that can be accessed during your lifetime. The two most common types of permanent life insurance are whole and universal life, each offering lifelong coverage and cash value growth. However, they differ in flexibility, guarantees, and how cash value growth is structured.
Living Benefits of Term Life Insurance
Term life insurance is generally less expensive than permanent insurance because it focuses solely on providing a death benefit to beneficiaries if the insured passes away during the policy term. However, some term life policies offer living benefits through riders, which are optional additions to the policy for an additional cost.
1. Terminal Illness Rider
Also known as accelerated death benefits, this rider allows policyholders to access a portion of the death benefit if diagnosed with a terminal illness, typically defined as having a life expectancy of two years or less. Funds can be used for various needs, including end-of-life care and personal desires like travel. The benefit amount received is deducted from the death benefit paid to beneficiaries.
2. Critical Illness Rider
Designed to assist with medical expenses related to severe illnesses like stroke, heart attack, or kidney failure, this rider provides a payout upon diagnosis. Like the terminal illness rider, the amount received reduces the death benefit paid upon the insured’s passing.
3. Chronic Illness Rider
This rider offers financial support if the insured cannot perform a certain number of daily activities due to a chronic illness. Like other riders, the payout diminishes the death benefit.
4. Return of Premium Rider
A unique type of term policy, this rider refunds premiums paid if the insured outlives the policy term. It tends to be more costly than standard term insurance.
5. Disability Waiver of Premium Rider
If the insured becomes disabled and unable to work due to injury or illness, this rider suspends premium payments while keeping the policy active.
These riders enhance the versatility of term life insurance by providing financial support beyond the traditional death benefit, albeit with adjustments to the final payout to beneficiaries.
Permanent Life Insurance Living Benefits
Permanent life insurance offers a death benefit similar to term life insurance but accumulates cash value on a tax-deferred basis, which term policies do not provide. Some permanent life insurance policies include accelerated death benefits like term life insurance.
Beyond these features, permanent life insurance provides four additional ways to access funds during your lifetime:
- Cash Value Withdrawal: You can withdraw some of the cash value accumulated in your permanent life policy. No taxes are owed on withdrawals up to the amount of premiums paid. However, any portion withdrawn from interest, dividends, or capital gains may be taxable. Keep in mind that withdrawals reduce the policy’s death benefit unless repaid.
- Policy Loan: You can take out a loan against the cash value of your permanent life policy. Interest rates are typically lower than those other lenders charge, and there’s no need for a credit check or extensive restrictions.
- Policy Surrender: If you decide to cancel your permanent life policy, you can surrender it and receive the cash value as a lump sum. The insurer will provide this amount minus any outstanding loans and unpaid premiums.
- Long-Term Care Benefits: Adding a long-term care benefit to your permanent life policy allows you to use the death benefit to cover expenses not covered by health insurance. The death benefit is reduced by the amount used for long-term care, offering valuable financial support considering that a significant percentage of people aged 65 and older will require long-term care.
These living benefits enhance the flexibility and utility of permanent life insurance by providing access to funds for various needs during your lifetime.
Discover More About Life Insurance Living Benefits
To delve into the living benefits of life insurance and address any queries, consult a licensed insurance agent. If you lack an agent or advisor, utilize our agent locator tool. Alternatively, you can connect directly with an insurance company. Our nonprofit partners are committed to supporting our mission and can facilitate obtaining coverage either directly or through their network of agents and advisors. The crucial step is to initiate the process today.
Frequently Asked Question
What are life insurance living benefits?
Living benefits are additional features in life insurance that provide financial support while you’re alive. They can include options like accessing the policy’s cash value or receiving a portion of the death benefit if certain conditions, like illness or disability, are met.
What types of benefits do living benefits offer?
Living benefits can vary but commonly include accelerated death benefits, which provide early access to a portion of the death benefit if diagnosed with a terminal illness. Other types may cover critical illnesses and chronic conditions or provide long-term care benefits.
How do living benefits affect my life insurance policy?
Utilizing living benefits generally reduces the death benefit available to beneficiaries. Withdrawals or loans against the policy’s cash value can also impact the policy’s value and coverage.
Who can benefit from life insurance living benefits?
Anyone who wants added financial security during their lifetime may benefit from life insurance with living benefits. These options can provide funds for medical expenses, long-term care, or supplemental income in case of illness or disability.
How can I get life insurance with living benefits?
Consult a licensed insurance agent or advisor to obtain life insurance with living benefits. They can explain available options, help customize a policy to your needs, and assist in understanding any additional costs associated with these benefits.
Conclusion
Life insurance living benefits offer valuable financial protections while you’re alive, enhancing the utility of your policy beyond traditional death benefits. These benefits can provide peace of mind by offering access to funds for medical expenses, long-term care, or income supplementation during times of illness or disability. Consulting with a licensed insurance professional is crucial to explore these options further and tailor a policy to your needs. They can guide you through available benefits and potential impacts on your policy and help you make informed decisions to protect your financial future.