Living benefits of life insurance allow you to obtain a portion of the death benefit while still alive if you match the policy’s criteria. The goal of living benefits on life insurance is to give money for you and your family in the event of a significant health-related event. The three types of living benefits discussed here are terminal disease, critical illness, and chronic illness.
What Kinds of Life Insurance Provide Living Benefits?
Living benefits of life insurance are not limited to any one type of life insurance. They are available on all three primary types of life insurance. This means that living benefits are available on
- Term life insurance
- Whole life insurance
- Universal life insurance.
The availability of living benefits on a specific type of life insurance varies by company. This means that a company may offer living benefits on one kind of life insurance but not on all life insurance. In addition, the special living perks can also differ depending on the product category inside a company. As a result, although some businesses may offer whole life plans with substantial living benefits, others may show term life insurance with less generous living benefits.
How They Operate
Living benefits are essentially an insurance policy rider. These riders, in general, have no upfront expenses. This implies you don’t have to pay a premium to have them available. Instead, when you activate these perks, you often spend an administrative fee–usually a few hundred dollars to activate the option.
The insured must have a particular health circumstance that qualifies them for living use to activate the benefit. These conditions are typically classified into three broad categories:
Terminal Illness: A condition in which life expectancy is limited to a few months, for example, 12 months or less.
Chronic Illness: A persistent loss of ability to execute a set number of Activities of Daily Living (ADL) or mental incapacity.
Critical Illness/Injury: Typically, a list of various illnesses or injuries (less frequently injuries) that have substantial health and often financial consequences (e.g. heart attack, metastasised cancer, and stroke).
Suppose the insured meets the conditions outlined in the life insurance contract to qualify for a living benefit. In that case, they file a claim with the insurance company to obtain an advance on their death benefit while still alive.
The insurer will usually seek verification from a licensed medical specialist that the insured meets the medical criteria for a terminal, chronic, or critical illness.
The distinction between living benefits and cash value benefits
While some people believe the cash value accumulation element of whole life or universal life insurance to be a “living benefit,” this isn’t what most insurance companies and marketers mean by the word.
Indeed, the cash value of the whole life or universal life policy can be used, which is valid while the insured/policy owner is still alive. However, the industry views cash value as a distinct characteristic and reserves the living benefits term to forward a portion of the death benefit when the insured meets specified criteria.
The Tax Repercussions
When a life insurance policy’s living benefit is triggered, the insurance company advances a portion of the death benefit to the policy owner. While the tax ability of a life insurance death benefit is well-established, the laws governing advanced death payments to surviving insureds are far more complicated.
In truth, there is no explicit regulation that states what occurs when someone uses a life insurance living benefit. Furthermore, the IRS has yet to issue a position on how these advancements should or should not be taxed.
Life insurers went to tremendous pains to incorporate numerous technical components into living benefits to comply with what they viewed as the spirit of the law, which allows the payment of living help to be tax-free. As a result, the current presumption is that living benefits payments are tax-free to the insurance owner/insured.
The Benefits and Drawbacks
While the benefits of having a life insurance policy with living benefits appear to be tremendous, there are a few potential dangers to be aware of.
First, on the plus side, living benefits provide much-needed money when dealing with significant health issues, often leading to financial devastation. This capital can mean the difference between keeping one’s finances intact and losing them during the ordeal.
Living benefits of life insurance can also provide access to experimental procedures that are typically not covered by health insurance.
Living benefits can assist in meeting the costs connected with long-term care needs, potentially allowing a person to remain in their home for a more extended time.
Finally, life insurance living benefits may help someone attain their ultimate life objective by providing the finances required to begin the work when faced with a terminal illness.
However, there are several dangers about living benefits that you should be aware of.
To begin with, not all living benefits work in the same manner. You should take the time to learn what kind of coverage you have and what you don’t. This can be difficult at times because precise information is sometimes ambiguous.
The desired living benefits may not be accessible with the life insurance company you wish to do business with. For example, a less priced coverage may not provide the living advantages you require. Alternatively, a firm from whom you already have a policy may not be able to give you new insurance with living benefits.
Finally, you should carefully examine the impact of using the living benefit on the death benefit you intend to provide to your beneficiary (ies). When a portion of the death benefit is advanced to the insured, less death benefit is left over for their loved ones after death. Thus, many living benefits act as loans against the death benefit of the policy.
An exciting element reduces the remaining death benefit due to beneficiaries–this is one method insurers try to maintain the payment of living benefits tax-free. So you should carefully consider how using the living help affects your policy, both now and in the future.