Living benefit life insurance may allow you to access your death benefit while you’re still alive under select circumstances, usually related to failing health.
As most people get older, they run into more complicated (and expensive) health concerns. Living benefit life insurance is a financial hedge that provides policyholders with the ability to access a portion of their death benefit while they’re still alive — under select circumstances.
In this article, we at the MarketWatch Guides Team will explore what a life insurance policy with living benefits offers and help you decide if this is the best life insurance for you.
What Are Life Insurance Living Benefits?
There are a number of situations when you might need early access to the cash value of your policy. For example, about 70% of senior citizens will require some type of long-term care during their lifetime. Long-term care may not be covered by either standard health insurance or Medicare Part A and Part B. Even if you’re below retirement age, an accident or illness might leave you with an immediate need to cover medical expenses or pay for loved ones’ day-to-day needs as you recover.
A living benefit rider is an insurance add-on coverage that allows you or your beneficiaries to access the death benefit of a life insurance policy while the beneficiary is still alive. Living benefits insurance may be offered as its own policy or as a rider that you can add to whole life or term life insurance. Some life insurance companies refer to this add-on as an accelerated death benefit rider.
The qualifying circumstances under which you can access your accelerated death benefit will vary based on the rider you purchased. Some of the most common living benefit options that may allow you to access your death benefit early include the following:
- Terminal illness: Terminal illness living benefits insurance gives you access to your death benefit if you’re diagnosed with an illness with an anticipated life expectancy of six months to two years, depending on the insurance company. For example, if you’re diagnosed with end-stage renal failure with an estimated one year to live, a terminal illness rider might allow you to use the death benefit as a lump sum payment to cover end-of-life care.
- Chronic illness: Chronic illness riders let you use your death benefits if you’re diagnosed with a recurring illness that significantly impairs at least two of the six activities of daily living (ADLs). ADLs include eating, putting on clothes, bathing, toileting, transferring and continence. You can use the proceeds from a chronic illness rider to cover the cost of in-home care and gain more quality of life.
- Critical illness: A critical illness kicks in when you suffer a sudden life-threatening illness, such as a heart attack or stroke.
If allowed to tap into your death benefits early, you usually get a lump sum. You may be eligible to receive the entire death benefit or only a percentage of it. It all depends on medical bills or other care needs spelled out in the terms of your policy.
How Life Insurance Living Benefits Work
To access living benefits, a policy owner must meet certain qualifying criteria, which are outlined in the policy. Typically, this includes being diagnosed with a serious illness or condition, such as cancer, heart attack, stroke or terminal illness. An insurance agent working with your provider can guide you in the next steps to navigate the claims process.
You must already have a life insurance plan in place with your living benefits rider when you’re injured or get sick to qualify for a payout. Most life insurance living benefits include a waiting period from the time you sign onto coverage until the date when your insurance goes into effect, which prevents you from buying the add-on after you qualify for the benefit.
How to Get a Life Insurance Policy with Living Benefits
To get a life insurance policy with living benefits, research insurance companies that offer it. Look for policies that specifically mention living benefits or accelerated death benefits. Both term and permanent life insurance policies may offer these riders, and coverage is available from most major insurance providers like New York Life and Nationwide. You can also work with a licensed insurance agent or financial professional, either of whom can help you find policies that fit your needs and budget.
Once you find a policy you’re interested in, you’ll need to apply for coverage. That usually involves filling out an application and undergoing a medical exam, which helps the insurance company determine your risk profile and your cost of coverage. If you have a pre-existing medical condition, you may need to provide additional information or documentation to the insurer. The best no-exam life insurance options could be appealing for those already showing symptoms of a disqualifying disease.
Riders
If you’re approved for coverage, you can add a living benefits rider to your policy if it’s not already included. This typically increases the cost of the policy, but it provides valuable coverage in case of a serious illness or condition. The added tax-deferred growth of a cash value life insurance with this extra benefit can provide more complete peace-of-mind for your loved ones if you’re growth- and investment-oriented.
If your policy includes some form of living benefits as standard coverage, you may be able to use the rider to add extensions listed above. For example, your policy might include critical illness benefits as a part of its standard life insurance coverage but include nursing home care as a rider. Specific insurance products offered will vary depending on the company you’re working with.
Cost of Living Benefit Life Insurance
Living benefit life insurance adds more cost to your policy. Because a living benefits add-on increases the number of qualifying circumstances when your insurance provider will need to issue the death benefit, plans with living benefits are riskier. Hence the extra cost. Other factors that influence the price you’ll pay for living benefit life insurance may include:
- Coverage structure
- The frequency with which you use alcohol and tobacco products
- Total accessible death benefit
- Your medical history
- Results of an in-person medical examination
- Your age, height and weight
Cash Value of Living Benefit Life Insurance
Cash value life insurance policies can offer living benefits in the form of cash withdrawals or loans against the policy’s accumulated cash value. Depending on the specific policy and insurer, policyholders may be able to access a portion of the cash value to cover expenses such as medical bills. For example, a whole life insurance plan with an investment portion may allow you to take a low-interest policy loan to cover medical expenses if you’re diagnosed with a terminal illness.
The Bottom Line
Is living benefit life insurance worth the money? To answer this question, take stock of your household emergency fund. In most cases, you will only be able to access a living benefits’ death benefit in extenuating circumstances, including intensive hospitalization or a long-term stay in a nursing home.
If your emergency fund plus the coverage on your health insurance, would provide sufficient coverage for these circumstances, a traditional life insurance plan may be enough for your needs. If not, consider a living benefits policy.
Frequently Asked Questions About Living Benefits of Life Insurance
Living benefit insurance may be worth the cost if you’re healthy but at a higher risk of developing a terminal illness — or if you work in a high-risk profession. While this type of life insurance may not be your best option for cheap life insurance, it can enhance your peace of mind if you have limited savings available.
The term “death benefit” refers to the payout that a policy’s beneficiaries are entitled to if the policyholder dies while the policy is active. A living benefit rider is an extension that allows policyholders to access the death benefit while they are still alive under qualifying circumstances. Living benefits may be included as a term of the policy itself or added onto a term or whole life policy for an extra cost.
The benefits of life insurance with living benefits can provide enhanced peace of mind, especially if you have limited savings for health care expenses. However, these policies are more expensive than traditional life insurance plans, which may not make them the best choice for those looking for limited, affordable protections.
Living benefit insurance works by allowing policyholders to access a portion of their death benefit while they’re still alive. The circumstances under which the policyholder can access the death benefit varies by rider or plan terms, and are usually related to terminal illness and critical care needs.
Term life policies provide a death benefit to beneficiaries only if the policyholder dies during the active term of the policy. Whole life policies cover the policyholder’s entire life and guarantee a payout to beneficiaries as long as premiums were paid up at the time of death.