What Are Life Insurance Living Benefits?
Life insurance living benefits allow you to tap into your policy’s payout while you’re still alive.
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Living benefits in life insurance are benefits that you can access while you’re alive.
Some living benefit riders pay out part of your death benefit if you’re diagnosed with a serious illness.
Permanent policies build cash value, which can supplement your income when you retire.
Most people buy life insurance to provide financially for their loved ones when they die. But some policies offer benefits while you’re still alive.
If you purchase life insurance with living benefits, you may be able to access part of your death benefit if you become ill or use the cash value of a permanent life insurance policy to shore up your income.
What are life insurance living benefits?
Life insurance living benefits are policy features that can be accessed while you’re still living. There are two main types of living benefits in life insurance:
Policy riders. A life insurance rider is an add-on to your policy that provides extra protection. Some policy riders allow you to receive part of the policy’s death benefit in certain situations, like if you are diagnosed with a serious illness or need long-term care.
Cash value life insurance. Permanent life insurance policies have a built-in savings component called cash value that grows over time. You can usually take a loan or withdraw from the policy’s cash value once you’ve built up enough. Some people use their policy’s cash value to support their retirement income.
Living benefits in life insurance can provide extra financial security if you become sick or need an additional source of income. One downside, though, is that living benefits often reduce the policy’s death benefit for your survivors.
Living benefits riders
A living benefits rider is a feature in a life insurance contract where the insurer agrees to provide coverage if you are diagnosed with a chronic or terminal illness, become disabled, or require end-of-life care.
Common types of living benefits riders include the following.
Accelerated death benefit rider
This rider pays out some or all of a policy’s death benefit if you’re diagnosed with a serious illness. Your payout reduces the amount of money your survivors receive after you die. Insurers have different rules for when you can use an accelerated death benefit rider. For example, you may not be eligible to access your death benefit unless you’re diagnosed with a terminal illness where life expectancy is 12 months or less.
Some insurers also offer critical illness riders or chronic illness riders, which pay out if you have a heart attack, stroke, cancer, renal failure or certain other qualifying illnesses.
Though you have to pay more for most living benefits riders, some insurers may automatically include accelerated death benefits in your policy. If you have an older policy, check to see if your insurance company may have added one of these riders.
Long-term care rider
When you buy life insurance with a long-term care rider, your insurer will pay out part of your policy’s death benefit if you require long-term care that traditional health insurance doesn’t cover. You may be able to choose between a lump sum payout or a percentage of your death benefit each month.
As with an accelerated death benefit rider, the payout may reduce what your beneficiaries receive. Many policies have a 90-day waiting period before you can access this benefit.
Return-of-premium rider
A return-of-premium rider refunds some or all of your term life insurance premium payments if you outlive the policy term. This is one of the most expensive life insurance riders. If you cancel your policy before it expires, you won’t receive a refund.
Waiver of premium rider
This benefit allows you to pause life insurance premium payments while keeping the policy in force if you become disabled and can no longer work.
Many policies have a waiting period of a few months to a year from the time of diagnosis until you can use this benefit, though insurers may reimburse you for premiums paid during this time once your claim is approved. Some insurers also allow you to activate a waiver of premium rider if you become unemployed for a period of time, like six months.
Cash value as a living benefit
When you buy permanent life insurance, your premium is split between the cost of insuring your life and the policy’s cash value. You can eventually use cash value life insurance to take out a policy loan, make withdrawals or surrender the policy.
Some people also use their cash value to pay premiums or purchase additional coverage called paid-up additions. Usually, you won’t owe taxes on money you borrow or withdraw as long as you don’t take out more than you paid in premiums.
Cash value can be a valuable source of money to retirees on a strict budget. However, withdrawals and outstanding loans generally reduce a policy’s death benefit.
Pros and cons of life insurance living benefits
The advantage of life insurance with living benefits is that you and your loved ones have a financial safety net for unexpected events like illness or loss of income. And some living benefits riders, like the accelerated death benefit, may be added to your policy at no charge.
There are some disadvantages to using living benefits. In general, accessing your death benefit while alive reduces the amount left for beneficiaries. And if you’re using the cash value of permanent life insurance as a source of income, any unpaid loans or withdrawals will also affect the death benefit available.
How to get life insurance with living benefits
It’s important to think about whether you need life insurance with living benefits while you’re shopping for a policy. You typically can’t add riders to an existing policy. Read your contract thoroughly so you know whether any riders are automatically included and how those riders work. Ask your life insurance agent or broker about the cost of any living benefit riders you’d like to add.
Also, consider whether you want access to living benefits when deciding what type of life insurance to buy. Term life policies offer only a death benefit and don’t build cash value. Any living benefits you receive from term life insurance will come from a policy rider. If you want access to cash value, you’ll need to purchase a permanent life insurance policy like whole or universal life.
Cost of life insurance with living benefits
The cost of life insurance with living benefits can vary. For example, some insurers automatically include some living benefit riders like accelerated death benefit riders. But with other policies, these add-ons can increase life insurance premiums by as much as 25%.
Other living benefit riders are even more expensive. For instance, term life insurance with a return of premium rider often costs about three times more than a standard policy.
Also, permanent life insurance policies that build cash value are much more expensive than term life policies with a similar death benefit. For example, a $250,000 permanent life insurance policy for a 35-year-old man in excellent health costs seven to 14 times more than a 30-year term policy for the same amount. These estimates come from Quotacy, a life insurance brokerage.
Do you need life insurance with living benefits?
To determine whether you need life insurance with living benefits, think about the level of financial security you’re seeking. If you want the flexibility to use part of your death benefit in the event of a catastrophic illness, life insurance with living benefits may be worth any additional cost.
If you’re hoping to eventually use cash value as a retirement income strategy, discuss your options for permanent life insurance as well as alternatives, such as buying a cheaper term policy and investing the money you save on premiums.
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