The primary goal when buying life insurance is to provide financial protection for your family or loved ones after your death. That’s how most people use it: after your death, your named beneficiary will receive a life insurance payout (also called a death benefit) for the amount of money listed in your policy. This is generally the case, whether you purchase a term life insurance policy or a different type of life insurance.
In some cases, life insurance can provide benefits to you (or your beneficiary) while you’re still alive. These benefits are called living benefits. Your policy documents will outline whether or not your life insurance benefits include living benefits.
Types of Life Insurance Living Benefits
Both term life insurance and permanent life insurance policies can offer living benefits. The most common use is to provide financial relief through early withdrawal of your policy’s proceeds, which are then used to pay for end-of-life medical expenses. Some companies refer to these types of benefits with terms like living benefits riders or as an accelerated death benefit rider.
Term Life Insurance Living Benefits
Accelerated death benefits are most often used to help with medical expenses, debt or other increased costs. In some cases, it may be used for the purposes of taking a “once in a lifetime” vacation to help make memories with loved ones. The types of riders most commonly associated with accelerated death benefits include:
- Terminal illness rider: This rider, which is often included automatically, gives access to your benefits if you are diagnosed with a terminal illness that leaves you a life expectancy of 6-24 months. The exact timeline will vary by insurance company.
- Chronic illness rider: This gives you access to your benefits if a chronic illness leaves you unable to perform at least two of the six Activities of Daily Living (ADL), such as eating, bathing, dressing, using the toilet, transferring and continence.
- Critical illness rider: Critical illnesses with high medical costs and shortened life expectancy may trigger this rider. Common illnesses include ALS, heart attacks, kidney failure, cancer and stroke.
- Long-term care rider: If you can no longer perform at least two ADL, this rider can disburse the death benefit for the sole purpose of paying for long-term care expenses. This type of insurance is often expensive.
There are two other main term life living benefits:
- Return of premium: All the premiums paid during your life insurance term are returned to you, provided you don’t pass away during the term. This kind of policy is often more expensive than standard term life insurance policies.
- Disability waiver of premium: With this living benefit, you may be able to skip your premium payments if you suffer a long-term disability for six months or more. This is not a true cash benefit, but it can be a valuable option. Most people see a 25% chance of facing a disability that could keep them out of work longer than 90 days over the course of their working life.1
Permanent Life Insurance Living Benefits
Permanent life insurance offers death benefits, but it also provides the ability to accumulate tax-deferred cash value—something that term life insurance doesn’t. Because of its cash value component, permanent life insurance can provide unique living benefits beyond accelerated death benefits:
- Life insurance policy loan: You may take out a loan against your permanent policy. While you’ll be charged interest, the amount is usually lower than that of other lenders. You can also skip a credit check and the number of restrictions are typically fewer than with traditional bank loans.
- Life insurance policy surrender: You can cancel your permanent life insurance policy and access its current cash value as one-time lump sum. The insurance company will provide you with that amount, minus any outstanding loans or unpaid premiums.
- Life insurance long-term care benefits: If you add a long-term care benefit to your permanent life insurance policy, you can tap into the death benefit and cover any long-term care costs not covered by health insurance.
Cash Value Life Insurance Living Benefits
Cash value insurance policies can allow you to withdraw funds from the cash value that you’ve built up over time. In addition, this value can accrue interest as long as the premiums are still paid. This cash value comes from your paid insurance premiums and is usually a component of a permanent or whole life insurance policy.
Most people choose to access the cash value of their insurance policy as a loan (complete with interest accrual) for later repayment, but you can also surrender the policy and receive the cash value, minus a surrender fee. If you don’t repay the loan, it’ll be subtracted from the policy death benefit.
SelectQuote Can Help Answer Your Life Insurance Living Benefits Questions
When buying life insurance, it’s important to consider how your insurance benefits may be used both before and after you pass away. Many life insurance policies now come with riders that can be used to help pay for expenses related to chronic or terminal illnesses.
If you have questions about a life insurance policy with living benefits, SelectQuote can help answer them. We’ll compare rates and policy details from dozens of insurance companies. You’ll then be able to choose a policy that works for your unique needs, from providing financial security for your loved ones after death to much-needed stability in the event of disability or illness.
1https://www.americanbar.org/content/dam/aba-cms-dotorg/products/inv/book/346779304/Sample.pdf
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