What Are Life Insurance Living Benefits?
Life insurance living benefits are financial benefits that life insurance policyholders can access during their lifetime. The two main types are cash value and living benefit riders. Cash value accounts grow over time and can be accessed through withdrawals or secured loans. Living benefit riders are endorsements you can add to a life insurance policy for extra benefits. For example, a rider could allow you to access your death benefit if you become chronically ill or disabled.
Key Takeaways
- Life insurance living benefits can provide you with financial resources during your life.
- Permanent policies often come with cash value components, which you can withdraw from or borrow against.
- Living benefit riders allow you to receive some or all of your death benefit if you become sick or disabled.
- Adding living benefits to life insurance usually increases the cost of coverage.
Types of Life Insurance With Living Benefits
The living benefits available may vary depending on the type of life insurance policy you choose.
Term Life Insurance
Term life insurance policies offer coverage for a set amount of time, such as 10, 20, or 30 years. Once your term ends, your coverage ends—unless you renew the policy or convert it to a permanent option. Term life policies don’t come with a cash value savings component, but insurers often offer living benefit rider options.
Permanent Life Insurance
Permanent life insurance policies offer coverage for the rest of your life and guarantee a death benefit, as long as you keep paying your premiums. These policies also typically come with cash value savings components and a lineup of living benefit riders.
With cash value, insurers deposit a portion of your premium payments into an interest-bearing account. Once it reaches a certain balance or accumulates for a given number of years, you can use the cash value to pay your premiums. Insurers also often allow you to withdraw from or borrow against the cash value.
Note
Permanent policies include whole life, variable life, universal life, variable universal life, and final expense insurance.
Types of Living Benefit Riders
Living benefit riders come in many forms. Here are some of the most common options. These are all considered accelerated death benefits.
Terminal Illness
A terminal illness rider allows you to withdraw some or all of your death benefit if you’re diagnosed with a terminal illness. To be eligible, insurers typically require that a medical professional estimates your remaining life expectancy under a certain amount of time, such as less than 24 months. Any amount you receive through the terminal illness rider will reduce the death benefit that your beneficiary receives.
Chronic Illness
The chronic illness living benefit allows you to withdraw a portion of your death benefit if you’re diagnosed with a chronic illness. Insurers have guidelines defining when you can file a chronic illness claim. For example, many insurers require a healthcare professional to confirm you can’t perform two of the six activities of daily living, such as feeding yourself and bathing.
Critical Illness
The critical illness rider is similar to the chronic illness rider but applies to a specific list of illnesses and health conditions. Common critical illnesses include strokes, heart attacks, kidney failure, paralysis, and cancer. If you’re diagnosed with a critical illness and have this coverage, you can receive a portion of your death benefit. However, insurers may limit your claims. For example, Nationwide only allows you to make one claim per year, per qualifying health condition from the same event.
Long-Term Care
A long-term care rider allows you to use your policy’s death benefit to pay for long-term care expenses such as:
- Home health care services
- Fees to stay in an assisted living facility or nursing home
- Costs to pay friends or family members who provide you with care
To be eligible, a U.S. licensed healthcare practitioner must typically confirm that you’re in need of long-term care.
Disability Waiver of Premium Rider
If you become totally disabled, this rider waives your premiums. As a result, you can maintain life insurance coverage while disabled without the need to make any additional payments.
How Much Is Life Insurance With Living Benefits?
The cost of life insurance depends on a variety of factors ranging from your age and health to the insurer you choose. Adding most living benefits to your policy will increase your cost of coverage.
For example, if you want to add a disability waiver of premium rider to a policy, it increases your premium by about 10% to 25%. Permanent policies with cash-value living benefits cost much more than temporary term policies without cash value.
To find out the specific costs of a particular living benefit, request quotes from top-rated life insurance companies.
How to Get a Life Insurance Policy With Living Benefits
If you’re interested in a life insurance policy with living benefits, start by identifying which living benefits you want. Next, shop around with life insurers to find those that offer the living benefits and sound like a good fit overall. Then, collect quotes from a handful of insurers and compare the offers side by side.
Look for insurers that include living benefit riders in the base life insurance coverage. For example, many include terminal illness riders at no cost.
Frequently Asked Questions (FAQs)
What Are the Cons of Life Insurance With Living Benefits?
Life insurance living benefits typically come with extra costs. For example, permanent policies are significantly more expensive than term policies, and adding living benefit riders often requires an additional fee. Upon use, many living benefits also reduce the death benefit your beneficiary will receive.
Can You Borrow From Your Life Insurance Policy?
If you have a permanent life insurance policy that’s accumulated enough cash value, you can borrow against it. Unlike term loans, you don’t have to repay the outstanding balance by a specific date. However, the balance will be deducted from your death benefit if you don’t repay it before passing away. Life insurance loans are generally tax-free, although the insurance company will charge you interest while the loan is outstanding.
What Happens If You Live Beyond Your Life Insurance?
If you outlive a term life insurance policy and don’t renew or convert it, your coverage will end and your beneficiary won’t be entitled to a death benefit. Insurers may offer ways for you to maintain coverage after a term policy expires (such as converting to permanent insurance), but often at a more expensive rate. You cannot outlive permanent insurance, which lasts throughout your lifetime, as long as you keep paying the premiums.
The Bottom Line
While life insurance allows you to leave behind money for loved ones, it can also help you prepare for whatever the future may hold in your lifetime. The cash value component on permanent life policies can provide you with a lump sum of cash to pay for large expenses such as college tuition or a down payment on a retirement home. Further, living benefit riders can help cover your expenses if you become sick or disabled.
Only you can decide whether the coverage and peace of mind are worth the additional cost. A good place to start is by collecting quotes so you can weigh the costs and benefits of adding extra living benefits.
Read the original article on Investopedia.