Life insurance protects your loved ones when you die. It gives them money to cover your final expenses at the very least and sometimes leaves dependents with income to support them in your absence, depending on the size of the policy you buy.
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But what about living benefits of life insurance or benefits you can use while alive? After all, you are footing the bill for the premiums. What if you need help?
Many life insurance policies offer benefits for the policyholder (you) that help you while you’re alive, namely if you suffer a chronic or terminal illness called living benefits. They come in various forms – either a rider or withdrawal/loan from a permanent life insurance policy.
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What Living Benefits are There?
The living benefits life insurance definition is any benefits policyholders can use while alive. You typically can’t use 100% of your policy’s value, but many can use a nice percentage.
Only some life insurance policies have living benefits. Term life insurance policies have them if you buy an additional rider (sometimes they’re included). Permanent life insurance policies, like universal life insurance with living benefits, have riders too, but you can also use the policy’s cash value to help in times of need.
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Most life insurance policies don’t automatically include living benefits. You either need to add the rider or use the cash value for the living benefits of a whole life insurance policy. You must meet the insurance company’s requirements to execute the rider, and sometimes fees are involved.
How do Living Benefits Work?
Life insurance with living benefits work differently depending on the type of coverage you have, whether term or permanent life insurance. On a generic level, you can cash in life insurance while still alive, but here are more details on how each type works.
The Living Benefit Rider
A living benefit rider is a separate policy you add to your policy. You can get whole or term life insurance with living benefits. Not every insurance agency offers them, so make sure you inquire if that’s something of interest.
The most common living benefit rider on term or permanent life policy is the accelerated death benefit rider.
This common life insurance rider provides life insurance you can use while living if you’re diagnosed with a terminal illness. If you can’t work and your health insurance doesn’t cover all aspects of your illness, it can strain you and your family as you blow through your assets and/or create new debt.
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The accelerated death benefit rider provides a portion of your death benefit early, but only if you’re diagnosed with a terminal illness. It provides access to your death benefit (or a part of it) to cover the bills, your needs, and even bucket list items while you’re still alive.
Some policies state how long you must live before tapping into the rider funds. Most policies say you can use it if you have 12 months or less to live, but each policy differs.
Chronic Illness Rider
If you have a chronic illness and become unable to do at least two of the six daily living activities, you may qualify to use your chronic illness rider. This rider covers the cost of any assistance you need with dressing, eating, grooming, toileting, getting around, or if you have trouble keeping your continence.
This is different from a terminal illness rider. You don’t have to ‘be terminal,’ but you must prove you can’t handle most daily living activities. For example, it would qualify you for the rider if you can’t get dressed and get around. But it wouldn’t be eligible if you only needed help with one issue, such as eating.
Critical Illness Rider
The critical illness rider pays you most of your death benefit to help with the costs of a severe illness or injury. Most policies pay this out in lump sum, but you can ask for installment payments if that’s preferable.
Permanent Life Insurance Policy Withdrawal
If you have a permanent life insurance policy with a cash value, you can use the funds throughout your lifetime in one of the following ways:
- Withdrawal – You can withdraw your policy’s cash value or a portion of it. Any amount you withdraw is tax-free as long as it’s less than the premiums you paid up until that point. Any amount above the premiums paid is taxable. Any amount you withdraw reduces the death benefit you leave for your loved ones, dollar-for-dollar.
- Loan – You can borrow against the cash value of your permanent life insurance policy. You don’t have to ‘qualify’ for the loan, but you’ll pay interest when you pay it back.
- Surrender – You can surrender your permanent life insurance policy to tap into the cash value. You’ll receive the proceeds after debts or unpaid premiums are paid off.
Who Should Have Living Benefits?
If you have a term life insurance policy or aren’t sure if your permanent life insurance policy will accumulate enough cash value, you may want to consider living benefits.
Whether it’s worth it for you or not depends on your family history. No one can predict the future, but knowing your family’s history of cancer, Alzheimer’s, or other serious diseases may help you choose living benefits.
If you know your chances of suffering a chronic or terminal illness are high, living benefits can put your mind at ease. If you know you don’t have the finances to cover what health insurance doesn’t, it’s good to have the peace of mind of a life insurance policy. Of course, no two policies are the same or offer the same benefits, so ensure you assess the quality of life insurance before taking it.
What are the Tax Consequences of Living Benefits?
Most policyholders don’t pay taxes on their living benefits, especially if you take the funds as one lump sum. If you take the funds in installments, though, and the balance earns interest before coming to you, you’ll incur taxes on the interest earned.
Pros and Cons of Living Benefits
Pros
- Helps ease the financial burden terminal or chronic illnesses cause
- Tax-free assistance during a time you need it the most
- You can use the funds how you want
- Provides peace of mind should you fall ill
Cons
- Living benefits riders add to your life insurance cost
- Permanent life insurance is quite expensive compared to term life insurance
- Reduces your death benefits for your loved ones if you use the rider
How Much Can You Get?
Every policy pays a different amount depending on your agreement. They generally pay between 25 and 100 percent of your policy’s face value. Some policies also have a dollar limit that takes precedence. You will exhaust your living benefits if you meet the dollar amount before the maximum percentage.
It’s important to note that living benefits are also one-time use. Once you use it, the benefit is gone, which makes sense since it’s a terminal or chronic illness rider.
If you don’t exhaust the full amount of your policy, your insurer will issue the difference to your beneficiaries when you die. Any amount you withdraw directly reduces the amount your loved ones receive.
What are the Fees?
The rare life insurance policy will include some type of living benefit, usually an accelerated death benefit rider.
Most policies, however, charge a fee. It’s usually a one-time fee when you sign up for life insurance. You may be able to add the rider later if you changed your mind and didn’t buy it originally.
There may also be fees if you activate the rider. Read your policy’s fine print to find out the exact fees. Some insurance companies charge a flat fee and others charge a percentage of the amount of money you withdraw. You may be able to have the fee withdrawn from your death benefit amount, which decreases the amount your loved ones receive.
Should You Have Living Benefits?
Every person is different, but looking for the best life insurance with living benefits provides you with peace of mind. With life being so unpredictable, there’s no way to know if you’ll suffer from a chronic or terminal illness and need financial help.
If you can find an affordable rider and don’t charge excessive fees if you use it, consider adding it to your life insurance. With life insurance and living benefits intact, you and your beneficiaries have the utmost financial protection should you fall ill and pass away.
