Life insurance decreases the financial risk of your death for your loved ones, providing the funds they need to keep living when you die.
But not everyone knows that some policies can actually provide you or your loved ones money while you are still alive.
I highly recommend that clients I work with look into living benefits as they shop for life insurance. These potentially protect you financially in the case of chronic, critical or terminal illness, disability, or even long-term care.
How do living benefits work?
There are two types of living benefits in life insurance.
The first kind is cash value life insurance. In permanent life insurance policies, there is a savings aspect that is built right into the policy. This is called “cash value,” and the longer you have the policy, the more the cash value grows.
Cash value life insurance gives you the option of withdrawing or taking out a loan from your policy’s cash value. For instance, some people use their life insurance’s cash value to supplement their retirement income.
The second kind of living benefit is a policy rider. Riders are basically “add-ons” to your policy that allow you to benefit in different ways.
Living benefits riders
A living benefits rider would allow you to access some of your “death benefit” — or cash payout — in particular situations. For instance, if you are diagnosed with a chronic, critical or terminal illness, the living benefits rider could allow you to access your life insurance money to pay for care.
In most cases, you have to pay extra for a living benefits rider. However, it could help you afford expensive treatments or care while you are alive, instead of leaving your loved ones with a mountain of medical or care debt upon your eventual death.
The kinds of living benefits riders include: long-term care riders, accelerated death benefit riders, return of premium riders and waiver of premium riders.
Long-term care riders
Long-term care riders kick in if you need long-term care that isn’t covered by regular health insurance.
This allows you to tap into part of your death benefit each month to pay for long-term care expenses at an assisted living facility or a nursing home. It also could cover in-home nursing care to guarantee your safety and health in the case of Alzheimer’s or dementia.
However, in order to gain access to your long-term care rider, your doctor would need to certify that you can’t do at least two of the basic daily living needs. These activities include dressing, eating or drinking; toileting; personal hygiene; contentance; housekeeping and mobility.
Accelerated death benefit riders
Accelerated death benefit riders activate if you are diagnosed with a critical or serious illness. This living benefit allows you to withdraw your money while you are still alive under these conditions. Usually people do this in order to cover medical expenses, but it is not limited to this purpose.
Often you are able to add death benefit riders to your policy for free. Of course, taking money out while you are still living will reduce the amount that would be paid out to your beneficiaries after you die.
The amount you are allowed to withdraw depends on the insurance company. Sometimes you can take out as much as 50% of the policy, but some companies cap it at $250,000 or $500,000.
Return of premium riders
Another type of living benefits rider is return of premium riders, which could refund you some or all of your premium payments if you outlive the term of your policy. This is one of the most expensive riders, and you can’t cancel your policy before it expires.
Eligibility will depend on your age, lifestyle, health status and the policy terms. It is important to talk with your trusted life insurance agent to weigh the pros and cons of this option.
Waiver of premium rider
Finally, there is the waiver of premium rider, which allows you to suspend your premiums while still keeping your policy. This is useful if you become disabled, seriously sick or are otherwise unable to work.
In order to qualify for this type of rider, you would have to meet specific age and health requirements, and there would be an additional fee. You also would not be able to add this type of living benefit if you are already physically impaired or have a pre-existing condition.
Similarly, a disability waiver could also protect you if you develop a long-term disability that prevents you from working for at least 6 consecutive months. This waiver would let you skip your premiums but keep your coverage until you recover and are able to return to work.
What are the pros and cons of living benefits?
There are plenty of pros when it comes to living benefits. The biggest benefit is that it offers you extra financial security if you become sick or need extra care later in life — or even just an extra source of income.
We can’t predict the future and what challenges we may face, but we can prepare ourselves and protect ourselves and our families from financial stress or disaster.
No one ever expects they will develop cancer, for instance, but nearly 40% of people will be diagnosed with this disease sometime in their life. The American Society of Clinical Oncology has determined that cancer treatment averages between $20,000 to $30,000 each year.
Having that protection can save you from accumulating massive debt.
Similarly, according to the U.S. Department of Health and Human Services, an average 65-year-old has a 70% chance of needing long-term care, which most health insurance policies do not cover.
The biggest downside of living benefits is that they reduce the death benefit for your survivors if you have to draw upon it while you were still alive.
Everyone’s needs and concerns are different, so getting a personalized insurance plan is key to your peace of mind. I’d love to sit down with you to discuss if living benefits are a good choice for you, and what option would be best.
