Have you ever heard the term living benefits? Do you know how do they work? And most importantly, is it really worth it to buy life insurance with living benefits?
These are all valid and excellent questions. In this guide, we would tackle the topic and outline what are living benefits, how can you use them, what is their cost, or basically everything there is to know about them. We all know generally how life insurance works: You pay your premiums every month and when you pass away, the policy pays out to your beneficiary. It sounds more like death insurance than life insurance. Therefore, it is hard for many to see value in life insurance since they would never see the benefits of their own policy.
The life insurance industry is slowly evolving trying to adjust to match the needs of today’s consumer. With that being said, more companies are offering life insurance policy without a medical exam, fast self-complete applications and policies with living benefits.
What we will cover:
So, what are living benefits in life insurance?
The rising need for living benefits
What exactly are living benefits and when can you use them
How do living benefits in life insurance work (example)
How much does life insurance with living benefits cost?
Simply put, the living benefits of life insurance is the option for the insured to use his or her life insurance policy while still alive. The insured does not have to die to use the policy. This could happen in 2 scenarios:
* Purchase a policy that builds up cash value.
* Purchase life insurance with living benefits.
In the first instance,
when purchasing a policy building cash value, the insured/owner of the policy could use the funds to help supplement his or her retirement income, or the help with other financial goals. Typically, permanent policies such as whole life insurance and universal life policies build cash value. Below are the pros and cons of the option:
- Money is growing tax-deferred over time
- Available to borrow against, if needed
- Can be used to pay for the policy
- Only available in permanent policies that are more expensive when compared to term insurance
- It does not grow significantly in the first years of the policy (some exclusions apply)
- It needs to be repaid, or it reduces the value of the insurance
In the second instance,
there could be no cash value involved. Living benefits are available in term and permanent life insurance policies. They are utilized in a form of accelerated benefit riders, helping with the cost of critical, long-term chronic and terminal illness conditions.
- They are built into many policies at no additional cost
- In some instances, they are available to use as early as 30 days from the issuance of the policy
- Available in term policies as well
- Money is payable directly to the insured and it doesn’t have to be repaid
- The use of accelerated benefit riders will reduce the death benefit
- The amount of the benefit available is based on the severity of the condition
- Benefits payable under an accelerated benefit rider may be taxable.
In this guide, we would turn our attention only to life insurance with living benefits as accelerated riders (the second scenario of using your life insurance policy while still alive)
The rising need for living benefits
Companies are understanding that people are living longer. More and more people are surviving critical conditions such as heart attack, stroke, invasive cancer and etc. Life insurance carriers are seeing the need to address this trend and provide better value product to their insureds.
Did you know that there are almost 800,000 heart attacks in the US per year? This is about 1 heart attack every 40 seconds!
The numbers are more than alarming. More than 800,000 lives are affected every year alone because of this condition alone. 1 in every 4 deaths in the US is due to a form of heart disease.
Just the thought alone is enough to give one’s chills.
Luckily, not every heart attack or heart condition is a death sentence. With medical advancements, people are able to survive and go on with their lives. However, what happens if you survive a heart attack?
If you are lucky, your health insurance would cover the cost of treatment, procedure, hospital stay, medications and etc. However, it would not cover any changes in your quality of life.
What do we mean by that?
There still would be bills, mortgage, child care, lost wages that need to be addressed. And if you are no longer able to go back to work, your financial situation could change drastically. You might not be able to maintain your family’s standard of living if you were financially impacted by a serious illness.
In fact, half of the bankruptcies filed occur due to medical reason. Medical expenses are the leading cause of bankruptcies in the US. It represents, job loss, divorce and disaster combined (need source)
Having a medical emergencies could not necessarily result in bankruptcy. Many families are forced to move out of their home or deplenish their saving accounts.
This is where having life insurance with living benefits could come in handy. It could provide the peace of mind that you will be able to overcome some health challenges financially.
What exactly are living benefits and when can you use them?
Living benefits are in the form of several different riders. Some companies have them build into their products, while others let you add for an additional cost. Living benefits are accelerated death benefit riders. They allow the insured to file a claim and access a portion of the death benefit, while still alive when a certain medical event occurs. They allow the insured to receive money that he or she could use to pay off medical bills, seek alternative treatment or even take his or his family on one last vacation.
Living benefits, their terms, and percentages vary between the different carriers however generally they fall into three categories.
Below we outlined under what circumstances would the different options apply:
Chronic – In order for the insured to qualify to use the accelerated death rider, he or she needs to be diagnosed, in the past 12 months, by a healthcare provider with illness or condition that permanently affects his or her life. You can qualify to accelerate your policy if you are not able to perform 2 out of the 6 Activities of Daily Living (ADLs).
ADLs: bathing, dressing, toileting, transferring, continence, eating.
You can also qualify if you require substantial supervision by another person to protect you from threats to your health and safety due to severe cognitive impairment.
Critical Illness – different carriers have different qualifying triggers. Some of this illness or conditions are:
- Major Heart Attack
- Invasive Cancer
- Major organ transplant
- End-stage renal failure
- Coma and etc.
Typically, you need to have the policy in force for at least 30 days prior to becoming eligible to accelerate your benefit. Also, it is important to point out that most carriers would pay out the benefit in a lump sum, rather than monthly installments.
Terminal illness– you would be able to accelerate your life insurance policy benefits under this rider if you have been advised by a physician that your illness or physical condition is likely to result in death within 24 months.
Please note that some companies would require a life expectancy of 12 months or less.
How do living benefits in life insurance work:
We would dedicate a separate post on how to file a
The company will provide you with claim form that you need to complete, sign HIPPA form and authorize your personal care practitioner to release your medical records. Once the company receives the complete package of forms back, they would review it and make you an offer. You at that time can decide if you would like to finalize the acceleration of benefits or not. It is really hard to predict the outcome of a claim. This is due to the vast number of variables that are involved. The biggest factor life insurance companies are considering when reviewing claim against the living benefits is life expectancy.
Here is an example:
Jason, the owner of the policy is 35 years old male. He purchases $500,000 life insurance with living benefits to protect his wife and 3 children. Jason’s monthly rate is $43.63 per month for a 20 – year level term policy. Jason does not smoke and qualifies for a standard rating.
Ten years after the issuance of the policy, Jason is 45 years old and suffers a Major Heart Attack. He decides to file a claim to accelerate $250,000 under the chronic illness rider. This means that he will receive a portion of his life insurance benefits now, rather than upon his death. When Jason files a claim, the carrier will determine the benefit based on the severity of his critical illness and how much it affects his life expectancy. Based on his personal situation, the carrier offers him $125,000 cash as acceleration benefit and he accepts.
Jason would receive $125,000 cash now and his life insurance policy would remain in force with $250,000 death benefit.
Jason was able to use the money to recover from his condition and take some time off work while having the peace mind that his family is financially taken care of.
How much does life insurance with living benefits cost?
Many clients we work with are surprised to hear that life insurance policy that includes living benefits it’s about the same price as one without.
We’ve dedicated a separate post on how companies determine the life insurance rates. You could review all of the factors that come into play.
Remember Jason from the example above? His life insurance policy cost $43.63 per month. An option for $500,000 20 year term with a
Just look at the image below:
We strongly believe that life insurance with living benefits is worth it. Obviously, there is never one solution that
If you are not sure if you could qualify for a policy with living benefits or you have any additional questions, please feel free to reach out to us. You can do so by filling out the quote form on the page, send us a message or simply give us a call. We take your privacy very seriously and your information would NEVER be sold to a third party.