Living Benefit Life Insurance: What You Need To Know

Living benefits in life insurance are benefits that can be accessed while the policyholder is still alive. While the primary purpose of life insurance is to provide financial protection for loved ones after death, living benefits offer an extra layer of financial security during the policyholder's lifetime. The two main types of living benefits are policy riders and cash value life insurance. Policy riders are add-ons that provide additional protection, such as allowing early access to a portion of the death benefit in the event of a serious illness or long-term care. On the other hand, cash value life insurance, which is exclusive to permanent policies, offers a savings component that grows over time and can supplement retirement income or cover large expenses. While living benefits enhance the flexibility of life insurance, they often come with extra costs and may reduce the death benefit for survivors.

Terminal illness riders

The terminal illness rider is usually added automatically by insurers but may come with a waiting period. For example, the policy must have been in force for two years, and there must be at least two years remaining until the maturity date. The amount that can be claimed may also be limited based on the policy, with a minimum of $10,000 and a maximum of $250,000. The amount received is often reduced based on the policyholder's age, sex, and interest rates at the time of the claim.

It is important to note that claiming the terminal illness benefit will reduce the death benefit paid out to beneficiaries. The amount claimed will be deducted from the benefit amount paid to the beneficiaries, so it is crucial to understand the terms and conditions of the rider to make informed decisions.

Critical illness riders

A critical illness rider is an optional add-on to a life insurance policy that provides a lump-sum payout if the policyholder is diagnosed with a specified critical illness. This includes illnesses such as cancer, heart attack, stroke, kidney failure, and certain types of surgeries. It offers extra financial protection in case of a serious illness and can be added to permanent life insurance policies such as whole life insurance or universal life insurance.

The critical illness rider allows you to access your death benefit while you are still alive if you are diagnosed with a qualifying health issue. Critical illnesses are typically specified by the insurer and may include heart attacks, strokes, and cancer. The rider must be added to the policy before the development of a qualifying condition, and proof of diagnosis from a doctor is usually required to activate it. The payout from the insurer can usually be used for any purpose and may be received as a lump sum or periodically over time.

It is important to note that the payout received through a critical illness rider will typically reduce the death benefit available to beneficiaries. Therefore, it is crucial to carefully check the policy details and understand how the rider will affect the beneficiaries' payout. Additionally, critical illness riders may have specific exclusions, such as pre-existing conditions, illnesses resulting from drug abuse, or self-inflicted injuries.

The benefits of a critical illness rider include financial assistance, flexibility in using funds, and comprehensive coverage beyond standard health insurance. It provides peace of mind and financial support during challenging times. However, there are also potential drawbacks, such as additional premiums, limited coverage, and waiting periods before claims can be made.

When considering a critical illness rider, it is essential to evaluate your personal health risk, family history, financial situation, and existing insurance coverage. It is also crucial to thoroughly understand the terms, conditions, covered illnesses, and exclusions of the rider before making a decision.

Chronic illness riders

The funds from a chronic illness rider can be used to cover medical expenses and other financial needs, providing essential support during challenging times. It is important to note that any money advanced through this rider is typically deducted from the final death benefit paid out to beneficiaries.

The cost of a chronic illness rider can depend on various factors, including the age, health, and lifestyle of the policyholder, as well as the specific terms and coverage of the insurance policy. It is important to carefully weigh the benefits of this rider against the potential drawbacks, such as reduced death benefits and higher premiums.

Long-term care riders

If you use your rider's long-term care benefits, your policy's death benefit will be reduced proportionately. If you don't use these benefits, your heirs will receive the full death benefit, minus what you owe on any policy loans.

There are two types of payouts for long-term care riders: indemnity and reimbursement. Indemnity plans provide a set amount each month to be used however the policyholder wants, while reimbursement plans require the policyholder to submit receipts for their monthly bills, which the insurance company then pays.

Before purchasing a long-term care rider, it is important to carefully read the terms and conditions, as benefit amounts, qualifying conditions, waiting periods, and payout methods vary depending on the insurer and policy.

Return of premium riders

When you purchase a permanent life insurance policy with a return of premium rider, you are guaranteed to get back all the premiums you have paid during your lifetime or a specified period. This means that if you keep the policy in force for the entire term (often until a certain age, like 65 or 70), you will receive a refund of every premium payment, typically as a lump sum. The refund amount does not include any interest, so it's not an investment in the traditional sense, but rather a way to recoup the costs of your life insurance protection.

For example, let's say you purchase a whole life insurance policy with a return of premium rider at a young age and pay annual premiums of $5,000 for 40 years. If you keep the policy active and in good standing, upon reaching the specified age or the end of the term, you would receive a lump sum payment of $200,000 ($5,000 x 40 years), effectively making your life insurance protection 'free' in terms of cost.

Benefits of a Return of Premium Rider:

The most obvious advantage of this rider is that it provides a way to recover the money spent on life insurance premiums, which can be a significant expense over time. This feature can be particularly appealing to those who view life insurance as a temporary need, as it offers the potential to get back what they paid in, essentially using the insurance company as a 'savings vehicle'.

Additionally, a return of premium rider can provide flexibility and peace of mind. If circumstances change and the need for life insurance diminishes (for example, your children become financially independent earlier than expected), having this rider ensures that the premiums you paid were not 'wasted'. The refunded premiums could then be used for other financial goals, such as retirement, education funding, or business ventures.

Considerations and Potential Drawbacks:

While the idea of getting back your paid premiums is enticing, there are some important factors to consider. First, policies with this rider tend to be more expensive than traditional permanent life insurance policies. The insurance company needs to set aside funds to ensure they can refund premiums, so your regular premium payments will likely be higher.

Additionally, to receive the full benefit of the rider, you must keep the policy in force for the entire term. Surrendering or cancelling the policy early will typically result in forfeiting the return of premium benefit, or at best, receiving a prorated portion of the premiums paid. Therefore, it's crucial to carefully consider your long-term needs and financial situation before opting for this rider.

In conclusion, a return of premium rider offers a unique proposition within the life insurance industry, providing the potential for policyholders to recover their premium costs. While this feature comes with added costs and requirements, it can be a valuable option for those seeking flexible legacy planning or who view life insurance as a temporary need. As always, consulting with a qualified financial advisor or insurance professional is essential to determine if this rider aligns with your specific goals and circumstances.

Frequently asked questions