Some life insurance policies provide access to funds while you’re still living through so-called living benefits. Living benefits offer flexibility, but it’s important to choose policy features carefully—it’s tempting to expect your life insurance policy to do too much. When that happens, you might end up with coverage that falls short of what you need. We’ll review how living benefits work and when they make the most sense.
What Are Living Benefits in Life Insurance?
Living benefits are features in your life insurance contract you can use while you’re alive. Most people use life insurance to provide much-needed funds for beneficiaries, but some policies include features that provide additional benefits before the insured person dies.
Examples of Common Living Benefits
Life insurance companies offer a variety of options, and some of the most popular living benefits are below. But an insurer might have creative ideas for benefits or use different language, so check with your insurance carrier to find out what’s available. It’s important to note that many benefits, also called “riders,” can typically only be added when the policy is issued and no later.
Accelerated Death Benefit (ADB)
An accelerated death benefit (ADB) feature allows you to take an advance on the death benefit if you meet specific criteria. For example, if you’re diagnosed with a terminal illness, need long-term care, or suffer from a chronic or critical illness, you may be able to get funds by “accelerating” the death benefit before death occurs. Using an ADB typically reduces the eventual death benefit that goes to beneficiaries. As a result, your loved ones may get less money, but they might be more than happy to see those funds go toward your comfort and care in your final days. If you’re planning for potential health issues, it’s relatively easy to find a policy with an ADB. The feature is common with permanent life insurance policies and it’s increasingly available with term insurance. You might even find this benefit in your workplace coverage. But not all ADBs are created equal. For instance, one company’s ADB may cover chronic, critical, and terminal illnesses, while another’s may only pay in the event of a terminal diagnosis. If this feature is important to you, be sure to compare the ADBs that different companies offer and their associated cost.
Access to Cash Value
Permanent life insurance policies, also known as cash value life insurance, often allow you to access your cash value. You can withdraw funds or borrow from your policy, and you can repay those funds to replenish the cash value. If you borrow against the policy, the money can be available without immediate tax consequences. Universal and whole life insurance are two common forms of permanent coverage that are designed to build a cash value. However, permanent policies frequently have surrender periods, during which time you may pay a surrender charge to withdraw funds. Also, outstanding loan balances that remain at death get deducted from the death benefit, leaving beneficiaries with a smaller payment. One drawback of both withdrawals and loans is that the policy could run out of money. This may happen if policy charges and/or interest charges eat up the remaining cash value. If the policy runs out of money, you could lose coverage and you may owe taxes on withdrawals that exceeded the amount you paid into the policy.
Waiver of Premium
If you’re disabled and you lose your income, it may be hard to afford life insurance premiums. But a waiver of premium feature can help you keep coverage in force—without the need to pay premiums. What’s more, any cash value buildup may continue uninterrupted. Disability is a risk for everybody, and waivers are available on both term and permanent policies. This option is typically inexpensive, and it can reduce your risk of losing coverage. Keep in mind that this is not disability insurance—it only keeps your life insurance in force during periods of disability. The specifics vary from policy to policy and premium waivers may be available for other situations as well. Check with your insurer to learn how this feature might affect your coverage and how much it costs.
Return of Premium
With term life insurance policies, you get temporary coverage for a specific number of years. Policies are relatively inexpensive, and coverage lasts until you stop paying premiums or the term ends. But some people believe those premium payments are a waste of money and they like the idea of getting their money back at the end of the term. A return of premium (ROP) is only available on term life policies. It refunds your money if you pay premiums for the life of the policy and do not die. If you die while the policy is in force, your beneficiaries get the death benefit, which is often significant. However, ROP policies cost more than standard term life policies—which makes sense since you’re taking less risk. But if you stop paying premiums early, you may forfeit the right to get your premiums back. So you need to be able to afford the premium payment for the entire policy term to use this feature.
How Do You Get Living Benefits?
Contact an insurance issuer or agent if you’re interested in buying a policy with living benefits. Every insurer is different, and in some cases, these benefits are optional riders that you include at an additional cost. For example, term life insurance policies might require you to pay extra to add an ROP rider. However, with permanent life insurance policies, the ability to withdraw funds and borrow from your policy is typically the default.
Is It Worth the Cost?
It’s important to evaluate the costs you pay for living benefits and decide if the expense is worth it. That’s a decision you can only make after reviewing your finances and discussing the pros and cons in detail with an insurance professional. For example, waiver of premium riders are often inexpensive, and the conventional wisdom is to add this option when available. But ROP riders can increase the cost of coverage significantly, which might make it difficult to afford adequate coverage.
Do You Qualify for Benefits?
Read your insurance contract carefully to understand how your policy works. Simply adding a rider doesn’t guarantee you’ll get benefits, as you often need to meet specific requirements. For example, an ADB might pay only a portion of the death benefit, leaving you with less money than you need for end-of-life care. What’s more, you may need to have coverage in place for several years before you take advantage of the benefit.
