The Power of Living Benefits
Most people buy life insurance so that their loved ones have financial security if they die. But life insurance could also benefit you while you’re still alive. Some life insurance policies come with living benefits—funds you can tap into while you’re still alive. These living benefits exist to provide financial support if you are diagnosed with a terminal illness, chronic illness, or require long-term care.
Though no one likes to believe that a serious illness could happen to them, the truth is that it’s fairly common. For instance, close to 40% of people will be diagnosed with cancer in their lifetime. And research from the American Society of Clinical Oncology finds that treatment could cost around $20,000 to 30,000 a year, about half of the average annual U.S. household income. There is also a 70% chance that the average 65-year-old will need long-term care services, according to the U.S. Department of Health and Human Services.
What is a life insurance living benefits rider?
Life insurance provides financial security in the event of death. A policy rider allows you to customize your policy to provide additional protection and/or benefits. Riders offer flexibility, enabling life insurance policy owners to design a combination of base policies and additional options that best suit their needs. Some riders are automatically included with the insurance policy; others must be requested. Some are included at no additional charge, while others require an additional premium. As you can guess, life insurance with living benefits is different from traditional life insurance. It does cost more.
The living benefits you may want to add depending on your risk tolerance and your ability to pay more. With more life insurance living benefits, you and your loved ones will have more options to use the policy while you are living. However, those additional protections often mean higher premiums. There is a chance you could pay for life insurance living benefits you never use. But there is also a chance you could face a serious illness or disability and find yourself wishing you had paid for the extra coverage.
Why do you need a living benefits rider?
The living benefits rider is popular because it provides an early payout of policy death benefits if the insured is diagnosed to have a life expectancy of 12 to 24 months or less. Some providers may require a life expectancy of six months or less. Life insurance with living benefits can help make the insured’s remaining time as comfortable and dignified as possible. It can also help with medical expenses.
Many terminally ill patients are faced with financial hardships during the worst possible time. While the patient may have substantial collateral in a life insurance policy, those funds are technically “off limits” until the policy owner dies. A living benefits rider breaks down the “off-limits” fence, enabling the policy owner to access policy proceeds; the amount that can be accessed depends on the type of contract. This payment, which is made to the policy owner rather than the beneficiary, reduces any cash value built up on the policy and the death benefit. The amount paid under the living benefit rider is typically between 25-100% of the policy's death benefit, and any benefit remaining at the time of death would then be granted to the policy beneficiaries less any life insurance company fees for the advanced payment.
The living benefits rider may be exercised only once. The rider will be terminated once a claim for accelerated benefits is made. Exercising this rider will reduce the available cash surrender value and death benefit of this policy. Keep in mind that to access living benefits in life insurance, you will need to submit a claim to your insurance company along with medical records and other documentation. The financial expenses of a terminal illness can be catastrophic, but a living benefits rider can offer some comfort and relief during this difficult time.
What Are Living Benefits?
Nowadays, many life insurance carriers offer living benefits on their plans or as a rider. The term “living benefits” simply means to utilize the death benefit before death. That is, you use it while you are alive. There are three common areas where the life insurance carrier allows you to use the death benefit before death:
(1) chronic care situations (i.e. similar to nursing home care) – Normally, after a 90-day waiting period, diagnosed with severe cognitive impairment, or a permanent condition resulting from sickness, injury, or illness. You can receive money to take care of your chronic care or custodial care needs. Usually, this means if you can’t meet 2 of the 6 activities of daily living or have a cognitive impairment. If this sounds like the definition of eligibility for long-term care, you are right. However, I must stress that the chronic care option is NOT long-term care insurance. This living benefit simply pays a lump sum benefit if you can’t meet 2 of 6 ADLs or if you are cognitively impaired. Most carriers require the permanence of your condition or illness as well.
(2) critical illnesses such as cancer and heart attacks – will pay a benefit if you are diagnosed with a covered illness such as cancer, heart attack, stroke, ALS, etc. You can then use this money for your insurance bills, doctor and hospital care, etc.
(3) terminal illness – Tap into a portion of your life insurance death benefit while you are still alive. If a doctor says you have fewer than 12 to 24 months to live, you can generally receive money for your use. You can use this money for your care, to take a vacation with your loved ones, or use it for anything you want.
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The third area, terminal illness, has been available for some time through many carriers. The other two areas are relatively new to consumers, although many carriers now include these options on their policies, either automatically or through a rider.
Not all carriers offer living benefits on their life insurance. Generally speaking, living benefits are available on the following types of life insurance: Term, Universal life, Index universal life, and Whole life. This concept is rather paradoxical with term life insurance. As you are aware, term life insurance contains no cash value to utilize during life. It simply provides a death benefit to your beneficiaries in case of your unexpected death. Sure, you might have a few life insurance riders, but they are more for your death or disability rather than “living”.
With the increase in critical illness diagnoses and the higher probability of long-term care services, several insurance carriers have added critical illness and long-term care (called chronic care) as riders to their base term life or permanent insurance policy. In most cases, this means that the insured can simply advance the death benefit early by some fixed and contractual percentage. That’s correct; you advance the death benefit early for your needs.
Are you wondering where the money comes from?
If you said, the death benefit, you are right. The advancement reduces your life insurance death benefit. The life insurance industry commonly calls this advancement “accelerated” benefits. Every carrier analyzes your situation a bit differently. They will analyze the severity of your condition and make you an offer, in concert with the terms and provisions of your policy. The advancement is income tax-free as you are advancing the death benefit early.
However, you don’t have to take the carrier’s offer. You can decline the offer and let your life insurance benefit remain intact. A life insurance policy with living benefits is described as a “Swiss army knife”.
What does the accelerated death benefit cover?
You will receive the accelerated death benefit as a lump-sum payment, and it can be used however you want. You can use the money for:
The accelerated death benefit rider is worth adding to your policy because it’s free. But it shouldn’t replace your savings, because using the rider decreases how much money your beneficiaries receive.?Most, but not all, basic life insurance policies offer this accelerated benefit rider as an inherent benefit of your policy, which means it’s included in the price of your monthly premium. Generally, an administrative fee is charged if the rider is exercised.
To reiterate, the increased incidence of a critical illness, terminal illness, or chronic-care need, coupled with the smaller, incremental cost, makes life insurance with living benefits worth the money. It gives you and your family financial flexibility when your family needs the money the most.
Source: Stephanie Colestock - December 04, 2019; Kacie Goff - Feb. 12, 2021; Chelsea Brennan November 30, 2021; Rebecca Shoenthal &Nupur Gambhir - June 20, 2022