What are living benefits of life insurance? Whole life insurance is typically used to help your loved ones after you die, it can also help them (and you) before that time by providing living benefits.
Term Life Living Benefits
Term life insurance provides coverage for a specific period of time, or term. If you die during that time, it will provide monies to your beneficiary (or beneficiaries).
For term life, there are a variety of living benefit options:
Death benefits that are paid sooner. If you have a terminal disease, this living benefit pays out a portion of your term life insurance policy. This provides you with much-needed funds to cover medical expenditures, debt, and other expenses. Many folks also utilize the money to go on a dream vacation or create other memories with their family. When it comes to this living advantage, keep the following four points in mind:
- When you can access the money, different insurers have different life expectancy timelines.
- Before you can get the living benefit, the insurance may need to be in place for a specific amount of time.
- On the portion of the accelerated death benefit that you use, you may be charged interest.
- After you die, the advance payment is usually deducted from the total amount your dependents receive.
A “critical illness rider” is a variation on this option that allows you to collect your death benefit if you’re diagnosed with a specific illness or disease.
Premium is refunded. All premiums paid during the time are refunded to you if you don’t pass away during the term with this living benefit. This type of policy is often more expensive than a regular term life policy.
Premiums are waived for people with disabilities. In the case that you are disabled for six months or more, you can use this living benefit to avoid paying your premiums. While not a true financial benefit, it is a valuable alternative to have because there is a three-in-ten probability that you will be out of work for 90 days or longer at some point during your working career.
Permanent Life Living Benefits
Permanent life insurance, like term life insurance, provides a death benefit as well as the option to build cash value on a tax-deferred basis, something a term policy does not.
Some permanent life insurance contracts, like term life insurance, offer the option of expedited death benefits.
Permanent life insurance also allows you to access assets in four additional essential ways during your life:
- Withdrawal of cash value A withdrawal allows you to access a portion of your permanent life insurance policy’s cash value. If the amount you withdraw is less than or equal to your premium payments, you won’t have to pay any taxes on it. If any part of the money you remove comes from interest, dividends, or capital gains, you’ll have to pay taxes on it. Also keep in mind that if you don’t repay the money, it will be deducted from the policy’s death benefit.
- This is a policy loan. If you take out a loan against your permanent life insurance policy, you’ll be paid interest, but it’ll normally be less than the interest charged by other lenders. You won’t be subjected to a credit check or be bound by a long list of conditions.
- Policy renunciation. When you cancel your permanent life insurance policy, you can get the cash value part as a one-time lump amount. The sum will be deducted from any outstanding loans and/or unpaid premiums by the insurer.
- Benefits from long-term care. When you add a long-term care benefit to your permanent life insurance policy, you can use the death benefit to pay for long-term care costs not covered by your health insurance. The amount of the long-term benefit that you use is usually deducted from the death benefit. When you consider that 70% of people reaching 65 today will want some type of long-term care at some point in their lives, it’s a vital living advantage to have.