Whole Life Insurance: Living Benefits For Peace Of Mind

Life insurance is often thought of as a way to provide financial protection for loved ones after death. However, life insurance can also offer benefits while the policyholder is still alive, known as living benefits. Living benefits allow the policyholder to access a portion of the policy's death benefit early if facing a serious illness or requiring long-term care. This provides financial support to cover medical expenses and other needs, offering peace of mind during challenging times. Living benefits are typically added to a policy through riders, which may be available for term or permanent life insurance policies. While accessing living benefits can reduce the final death benefit, it provides valuable financial assistance when it's needed most.

Terminal illness

With a terminal illness rider, the policyholder can receive a lump-sum payment or access a significant portion of their death benefit in advance. This money can be used to cover various expenses, such as medical bills, hospice or nursing home care, in-home caretakers, and other end-of-life expenses. It is important to note that accessing these living benefits will usually reduce the final death benefit paid out to beneficiaries.

Living benefits, including terminal illness riders, provide valuable financial protection for individuals facing serious illnesses. They can help cover the high costs of medical treatment and long-term care, ensuring that the policyholder can focus on their health and well-being without the added stress of financial burden.

When considering a life insurance policy with living benefits, it is important to carefully review the terms and conditions, including any restrictions, limitations, and potential tax implications. Consulting with a financial advisor or insurance professional can help individuals make informed decisions about their coverage options and ensure they understand the benefits and potential drawbacks of these riders.

Chronic illness

Living benefits are a feature of some life insurance policies that allow the policyholder to access certain benefits before death. Chronic illnesses are defined as conditions that last at least a year and require ongoing medical attention, limit activities of daily living, or both. A chronic illness rider (CIR) is an optional feature that can be added to a life insurance policy to provide benefits if the policyholder becomes chronically ill. This can be added to permanent life insurance policies, such as whole life insurance, or, depending on the insurance company, to a term life insurance policy.

A CIR provides financial support if the policyholder becomes chronically ill, which is often defined by an inability to perform daily activities or severe cognitive impairment. The benefits of a CIR can include coverage for medical expenses, long-term care costs, home modifications, and more. The specific benefits and covered conditions will vary among providers.

The benefits received from a CIR are usually paid out in regular payments, which can be used to cover medical expenses, long-term care, or other costs related to the chronic illness. This financial support can help manage the high costs often associated with chronic illnesses and provide peace of mind during a challenging time.

When considering a CIR, it is important to assess your personal health history, financial situation, age, and other available options. Adding a CIR to a policy typically results in higher premiums, and there may be potential limitations and specific terms to consider. It is recommended to consult with an insurance professional to understand how a CIR aligns with your individual needs and financial goals.

Critical illness

The cost of critical illness insurance varies depending on factors such as the extent of coverage, the age, sex, and health of the insured, and family medical history. It is generally affordable, with some smaller plans costing as little as $25 per month. However, it is important to carefully review the policy, as coverage may be limited to specific illnesses and circumstances. Additionally, there may be restrictions or reduced payouts for older individuals.

In summary, critical illness insurance is a crucial component of whole life insurance, offering financial protection and peace of mind in the event of a critical illness. With its flexible payout and affordable premiums, it ensures that individuals can concentrate on their well-being during challenging times.

Long-term care

Combination (Life/Long-Term Care) Products

Some insurance companies now offer combination products that merge life insurance with long-term care insurance. This addresses the concern of consumers who are reluctant to purchase long-term care insurance, fearing that their investment will be wasted if they do not utilise it. With these combination policies, policy benefits can be paid out in one form or another. While these products are relatively new and evolving, they offer a solution that ensures benefits are accessible during the policyholder's lifetime.

Accelerated Death Benefits (ADBs)

Accelerated Death Benefits (ADBs) are a feature included in certain life insurance policies. ADBs allow policyholders to receive a tax-free advance on their life insurance death benefit while they are still alive. This can be particularly useful for long-term care services. Sometimes, an additional premium is required to add this feature to a policy, but some insurance companies include it at little or no extra cost. ADBs typically cover situations where the policyholder is terminally ill, has a life-threatening diagnosis, requires long-term care services for an extended period, or is permanently confined to a nursing home and unable to perform basic activities of daily living (ADLs). The monthly benefit for nursing home care is usually equal to a percentage of the life insurance policy's face value, and home care may be included at half that amount. It's important to note that utilising ADBs will reduce the death benefit payout for beneficiaries.

Viatical Settlements

Viatical settlements allow policyholders to sell their life insurance policy to a third party, typically a viatical company, and use the money received to fund long-term care. This option is only available to those who are terminally ill and have a limited life expectancy. During the settlement, the viatical company pays a percentage of the death benefit based on the policyholder's life expectancy. The company then becomes the owner and beneficiary of the policy, assuming responsibility for premium payments. As a result, the policyholder receives funds for their care, and the viatical company collects the full death benefit upon their death. Money obtained from a viatical settlement is generally tax-free if the individual has a life expectancy of two years or less or is chronically ill, provided the viatical company is licensed in the relevant states.

Living Benefit Programs

Living benefit programs provide a lump sum payment to individuals who meet specific medical criteria. This option allows policyholders to receive up to a certain percentage of their life insurance policy's death benefit while still reserving a portion for their beneficiaries. It's important to note that this is essentially a loan against the policy, and the entire loan amount, including interest, must be repaid; otherwise, it will be deducted from the death benefit. Living benefit programs work with various types of life insurance policies and can provide funds to cover senior care expenses.

Surrendering the Policy for Cash Value

Policyholders can choose to surrender their life insurance policy to the insurance provider, relinquishing ownership and the death benefit. If the policy has accumulated cash value, the insurance company will pay out the full amount of that cash value. However, taxes may be applicable, depending on whether the cash value exceeds the cumulative premium amount paid over the life of the policy. It's important to note that if the policyholder intends to use Medicaid for long-term care, the cash value of their life insurance policy may be considered an asset and impact their Medicaid eligibility.

Taking a Loan from Cash Accumulation

Policyholders can take out a loan from the cash value of their life insurance policy to fund long-term care. This option allows them to access funds without incurring taxes. However, they must be cautious not to take out the entire cash value, as this could cause the policy to lapse. Instead, they can borrow most of the cash value and repay the loan with interest. This approach may be suitable if the policyholder's healthcare needs are less than the amount of cash value available.

Using Cash Value to Fund a New Long-Term Care Policy

If there is time for advance planning, policyholders can consider using a 1035 exchange to fund a new long-term care policy without incurring tax exposure. This strategy involves utilising the cash value of an existing life insurance policy to purchase a new policy that includes long-term care benefits. For example, the cash value can be used to fund premiums on a hybrid policy, which combines life insurance, long-term care benefits, and living benefits for conditions like strokes, cancer, or other illnesses that may not be covered by traditional long-term care insurance.

Income replacement

Long-Term Financial Security:

Whole life insurance provides permanent coverage, guaranteeing a death benefit to your beneficiaries regardless of when you pass away. This means that your family will receive a payout that can help replace your income over the long term. This is in contrast to term life insurance, which only covers a specific period.

Accumulation of Cash Value:

One of the key living benefits of whole life insurance is the accumulation of cash value over the life of the policy. This cash value grows tax-deferred and can be borrowed against to supplement income or cover expenses such as a down payment on a house, college tuition, or emergencies. This feature adds flexibility and can help maintain your family's standard of living.

Peace of Mind:

Knowing that your family will have financial support in your absence provides peace of mind. This emotional relief is invaluable, allowing you to focus on your work and family without constantly worrying about their financial future. Your dependents can maintain their lifestyle and cover essential expenses with the benefits from your policy.

Customization Options:

Whole life insurance policies often offer various riders (add-ons) that can enhance income replacement. For example, a disability income rider can provide a monthly income if you become disabled and unable to work. Additionally, a long-term care rider can help cover the costs of assisted living or in-home care, ensuring your income is used efficiently for your family's well-being.

Protection Against Inflation:

With the cost of living adjustment rider, you can ensure that the benefits from your policy keep pace with inflation. This rider helps protect your policy's value, ensuring that the death benefit remains adequate to replace your income and maintain your family's purchasing power over time.

When considering whole life insurance for income replacement, it's important to consult with a financial advisor or insurance professional. They can help you evaluate your specific needs, family situation, and financial goals to determine the appropriate coverage amount and riders to adequately replace your income and provide for your loved ones.

Frequently asked questions