Life Insurance with Living Benefits

Many people purchase life insurance so that their loved ones will burden their family financially after they pass away. But do you know life insurance can also offer benefits while you’re still living?

Some insurance policies allow you to accelerate the death benefit or access your cash value during your lifetime through an option called a living needs benefit.

When you’re going through unfortunate circumstances, such as a chronic or terminal illness, life insurance with living benefits comes in handy. It offers you the protection you need without breaking your bank. 

Read on to learn more about the types of life insurance with living benefits, why you should purchase a policy with a living benefit rider, and find a plan that works best for you.

What Are Life Insurance Living Benefits?

Life insurance with living benefits means that you can access part of your death benefits while you’re still alive. Sometimes referred to as accelerated death benefits, these benefits allow you to access money to cover medical events such as terminal illness, chronic illness, or permanent disability occur and need money to cover your bills.

These types of benefits are available on both term life insurance and permanent life insurance policies.

While some policies have built-in living benefits, this is not the case for every company. For many, you may need to add living benefits to your life insurance policy through critical illness riders, which costs extra. The additional cost may also vary by company.

It’s crucial to understand different life insurance policies with living benefits to determine which is right for your needs.

Types of Life Insurance Policies With Living Benefits

Various life insurance policies provide different living benefits. Below are some of the most common types of policies that offer living benefits.

1. Term Life Insurance Policy

A term life insurance policy provides coverage for a specified term, usually anywhere between one and 30 years. It guarantees payment of death benefits to your beneficiaries, so long as you (insured policyholder) die during the specified term when the policy is active. Unlike whole life insurance, term life insurance policies have no savings component.

Term life insurance is the cheapest type of insurance, making it an attractive option for younger people. You can renew or terminate the insurance for another term or convert it to a permanent life when the policy expires. 

The living benefits options for term life insurance include:

An accelerated death benefit rider (ADB) allows you to access part of your death benefits under qualifying events before you pass away.

When a medical professional diagnoses you with a terminal illness, critical illness, or chronic illness, the insurance company pays out a portion of your death benefit to cover your medical expenses. 

The payout usually ranges from 25% to 100% of the death benefit, which may vary by company. You can also use the living benefit from a term life insurance policy to go on your dream vacation and make memories with your loved ones.

It’s important to note that not all riders come with accelerated death benefits built into the policy. For some, you may need to pay an extra cost. Also, depending on the insurance company you choose, the time you can access this living benefit may vary.

• Terminal illnesses: A terminal illness rider of a term life insurance gives you access to a portion of your death benefit if a medical professional diagnoses you with an ailment you cannot recover. Benefits under this rider may be taxable.

• Critical illness: A critical illness rider caters to your medical bills when a significant health emergency arises, such as cancer, heart attack, or stroke. The rider pays a large portion of your death benefit when diagnosed with a critical illness.

• Chronic illnesses: An insurance company considers you chronically ill when you cannot perform two of the six activities of daily living, such as eating, bathing, continence, transferring, dressing and toileting. In such situations, a chronic illness rider pays out part of your term life insurance benefit to cover the cost associated with chronic illness. 

• Long-term care riders: Unlike chronic illness riders, long-term care riders provide comprehensive coverage for conditions that require care for an extended period or nursing home care. To access this living benefit, a medical professional must certify that you cannot perform some of your daily activities.

Using accelerated death benefit riders will reduce the death benefit of your loved ones when you pass away. 

With a return of premium (ROP) rider, you receive all the premiums you paid for your term life insurance policy so long as you don’t pass away during the term. If you find it hard to save for the future, ROP makes an excellent choice for life insurance with living benefits. You can use the lump sum payment for any reason or even invest for retirement.

However, the rider costs more than a traditional term life insurance policy. The additional premium may vary depending on age.

Disability waiver of premium offers a living benefit by allowing you to waive the policy’s premiums if you become critically ill or disabled. According to the Social Security Administration, disability is unpredictable and can happen to anyone at any age. So there’s a high chance that you’ll face disability at one point in your career that will keep you out of work. This is where a waiver of premium becomes beneficial.

Usually, you may pay an additional cost for this rider if it is not built into the policy. The period in which the rider cover may vary or last up to a certain age.

2. Permanent Life Insurance Policy

As the name suggests, permanent life insurance refers to coverage that lasts your lifetime.

Since it has no expiration date, you receive the coverage benefits as long as you live, unlike term life insurance that lasts for a certain period.

There are two primary types of permanent life insurance policy: whole life insurance and universal life.

• Whole life insuranceis the most common type of permanent insurance policy. It provides coverage and guarantees a return on cash value as well as a death benefit after your passing.

• Universal life insurance accumulates cash value that earns interest based on the market performance. With universal life, you can adjust premiums and death benefits over time.

A permanent life insurance policy builds up a cash value that allows you to access the funds when unexpected events occur, called permanent life living benefits. Besides, the accumulated cash value is on a tax-deferred basis, meaning you’ll not pay taxes on any earnings.

You can access the living benefits of permanent life insurance policies in the following ways:

• Cash Value withdrawal: You can withdraw a portion of the cash value in your permanent insurance policy. The cash withdrawal is often tax-free, but if the amount exceeds your premium payments, it will be considered a taxable income. You’ll also owe taxes if the amount you withdraw is from dividends, interests, or capital gains. Also, keep in mind that withdrawing cash value reduces your death benefit for your beneficiaries when you pass away.

• Policy Loans: You can take up a loan on your policy. The loan can come from a portion of your paid premiums that accumulates cash value, along with any interest earned. Policy loans result in interest charges, but you don’t have to repay the loan. The insurance company will deduct any outstanding loan and accrued interest when you die. This will, however, reduce your policy’s death benefits.

• Policy Surrender: A surrender is a cancellation of your permanent insurance policy. If you exercise this option, you’ll lose the death benefit for your beneficiaries and any other living benefits associated with the policy. When you surrender your policy, the life insurance company will pay you the cash value portion as a lump sum plus accumulated interest. However, your insurer may deduct any outstanding loans, unpaid premiums, and surrender fees. The IRS could also charge you income tax on interest earned but not premium paid.

• Long-term Care Benefits: If you add long-term care benefits to your permanent insurance policy, you get paid under the accelerated death benefit. The company pays the benefit using a portion of your death benefit, which you don’t have to repay. The number of long-term care benefits may vary by the insurance company.

• Flexible funds for retirement: You can access cash from a permanent insurance policy and supplement your retirement savings without the requirements, penalties, or limitations that come with IRA accounts or 401 (k).

Reasons to Buy Life Insurance With Living Benefits

According to the Centers for Disease Control and Prevention (CDC), chronic diseases are the leading causes of death and disability. Life insurance companies expect the number to rise every year. While some insurance policies cover events, such as chronic illness, others require additional costs.

You need to consider all the benefits not covered by health insurance and the importance of living benefits. Here are some of the reasons to purchase life insurance with living benefits:

• Receive long-term care benefits in case of chronic illness or disability.

• Accelerate death benefits in events, such as terminal illness, chronic illness, or critical illness.

• Withdraw cash value or borrow a loan on your policy.

• Receive all your premiums paid when you surrender your policy.

• Waive premiums when you become critically ill or disabled.

• Supplement your retirement income with cash accessed from your policy.

• Receive return of premium.

All these benefits may vary depending on the policy you choose. Some may require an extra cost to access the living benefits. It is, therefore, important to find a policy that works best for your needs.

Finding the Policy that Works Best for You

Life insurance with living benefits acts as financial security whereby you can access the benefits while you’re still living. Choosing the right insurance policy can be challenging and sometimes confusing. Here are some guidelines that can help you choose a policy that suits your needs.

Consider term life insurance if:

• You need financial security for a specific period. Term life insurance provides coverage for a period of your choice. For example, if you want to save money for your child’s education, you can buy a 10-year or 20-year term life insurance. Or, if you want the insurance to repay a loan for a specific duration, buy a term policy for that period.

• You have a limited budget. A term life insurance policy is affordable for all budgets. But, if you want to include riders that can give you access to living benefits, you may need to pay an extra cost.

Consider permanent life insurance if:

• You need lifetime insurance protection. A permanent policy provides coverage as long as you live. This option, however, is more expensive, unlike term life insurance policy.

• You want to accumulate a savings component. With a permanent life insurance policy, you can grow cash value on a tax-deferred basis and may be substantial over time. You can also withdraw a portion of the cash value or borrow a loan under the policy. 

If you're still confused about the policy to choose, consider talking to an insurance agent who can help you make a better decision and give you life insurance quotes.

Frequently Asked Questions

How much does life insurance cost?

The cost of life insurance varies by company. Factors such as age and health may influence the price. If you choose to buy a term life insurance policy, you’ll pay less than permanent life insurance. This is because term life provides coverage for a specified term while the permanent policy is lifelong. Also, including riders with living benefits in a policy can add extra cost to your premium.

Should I get a policy with living benefits?

It depends on your needs and budget. A life insurance policy with living benefits gives you access to different benefits while you’re living. However, living benefits translates to higher premiums if it’s not built-in the policy.

Is life insurance with living benefits worth it?

Life insurance with living benefits can be of more importance when you face a chronic illness or disability. On the other hand, you can pay an extra cost and never use it. To help you determine if a life insurance policy with living benefits is worth it, consider talking to an experienced life insurance agent who will give you advice plus a life insurance quote.