Living Benefits: Life Insurance That Pays While You're Alive

Life insurance is typically purchased to provide financial protection for loved ones after the policyholder's death. However, some policies offer benefits while the policyholder is still alive, known as living benefits. Living benefits provide financial assistance to the policyholder during their lifetime, helping them prepare for the future and enhancing their financial security and flexibility. While term life insurance policies offer coverage for a set term, permanent life insurance policies offer lifelong coverage and guarantee a death benefit as long as premiums are paid. Permanent life insurance policies also typically include a cash value component, allowing policyholders to access funds during their lifetime. Living benefit riders can be added to both term and permanent life insurance policies, providing additional benefits such as accelerated death benefits, critical illness coverage, and long-term care benefits. These riders offer financial protection during significant life events or health issues, but they may come at an extra cost.

Permanent life insurance policies offer lifelong coverage and cash value savings components

Permanent life insurance policies offer lifelong coverage, meaning they remain in effect for the entirety of the insured's life, as long as the required premiums are paid. This is in contrast to term life insurance, which only lasts for a specific amount of time, typically 10, 20, or 30 years.

Permanent life insurance policies also include a savings element known as the cash value component. This allows policyholders to build cash value over time, which can be accessed through loans or withdrawals during the policyholder's lifetime. The cash value grows tax-deferred, meaning policyholders do not owe income taxes on the gains as long as the money remains in the policy. The cash value can be used for various purposes, such as paying premiums, funding retirement, or covering large expenses like college tuition.

There are several types of permanent life insurance policies, including whole life, universal life, and variable life insurance. Whole life insurance offers lifelong coverage with regularly scheduled premiums and builds cash value in a secure account. Universal life insurance allows for adjustable premiums over time, and the cash value growth is linked to the performance of investment options such as mutual funds or a securities index. Variable life insurance combines features of both whole and universal life insurance, offering fixed premiums and the ability to invest cash value in various investment options.

The choice between different types of permanent life insurance policies depends on individual needs and financial goals. Permanent life insurance policies offer the security of lifelong coverage, along with the ability to build cash value, making them a valuable tool for long-term financial planning.

Term life insurance policies offer coverage for a set amount of time

Term life insurance is a popular choice for those who want to secure their family's financial future. It is often chosen over permanent life insurance because it is more affordable and easier to understand. With term life insurance, you pay a premium for a specific period, and if you pass away during that time, your beneficiaries will receive a death benefit. The death benefit can be used to cover funeral costs, consumer debt, mortgage debt, and other expenses. However, if you outlive the policy and do not renew or convert it, your coverage will end, and your beneficiaries will not receive any payout.

While term life insurance does not have a cash value component like permanent insurance, some policies offer living benefit rider options. These riders can provide additional benefits during the policyholder's lifetime, such as covering end-of-life care and related expenses or helping with medical expenses for certain qualifying illnesses. Living benefit riders may also allow you to stop paying premiums if you suffer a disability that prevents you from earning an income.

When choosing a term life insurance policy, it is important to consider the different types available, such as level term insurance, decreasing term insurance, increasing term insurance, and term insurance with a return of premium. Additionally, it is advisable to compare plans from multiple insurers to find the one that best suits your needs and budget.

Overall, term life insurance policies that offer coverage for a set amount of time can be a valuable tool to protect your family's financial well-being in the event of your untimely death. By understanding the features and limitations of term life insurance, you can make an informed decision about the type of coverage that is right for you and your loved ones.

Living benefit riders can be added to permanent and term life insurance policies

Life insurance riders are add-ons to a policy that allow the policyholder to customise their coverage by adding more protection or specific benefits. Living benefit riders are a type of insurance rider that provides benefits that can be accessed and offer value to the policyholder while they are still alive.

Term life insurance policies offer coverage for a set amount of time, such as 10, 20, or 30 years. Once the term ends, the coverage ends unless the policy is renewed or converted to a permanent option. Term life policies do not come with a cash value savings component, but insurers often offer living benefit rider options. Some common types of living benefit riders for term life insurance include the return of premium riders, which allow the policyholder to receive a payout if they outlive the policy term. Another example is the long-term care rider, which can cover the cost of a nursing home or in-home nurse as the policyholder ages.

Living benefit riders can help cover expenses if the policyholder becomes sick or disabled. For example, the chronic illness living benefit rider allows the policyholder to withdraw a portion of their death benefit if they are diagnosed with a chronic illness. The terminal illness rider allows the policyholder to withdraw some or all of their death benefit if they are diagnosed with a terminal illness and have a certain life expectancy. The living benefits rider can also be used to cover living expenses for caregivers.

Living benefit riders can provide financial support and peace of mind to policyholders facing illness or other challenges. It is important to note that the availability and specifics of riders may vary depending on the insurance company and the jurisdiction in which the policy is purchased.

Accelerated death benefit riders allow you to access your death benefit early under certain circumstances

An accelerated death benefit (ADB) rider is a life insurance add-on that allows you to access your death benefit while you are still alive. This rider is particularly useful if you are diagnosed with a critical, chronic, or terminal illness, or suffer significant injuries, that will likely shorten your life. ADB riders are designed to help alleviate financial stress during challenging times, allowing you to cover medical bills, care costs, and other expenses.

ADB riders are a relatively new product, and older policies may not include them. Many insurance companies now include ADB riders in their policies at no extra charge. However, if your existing policy does not have an ADB rider, you can request to add one. Note that adding this rider may increase your premium. If your insurer charges extra for the rider, consider whether developing a serious illness would result in financial hardship for you or your loved ones. Depending on the cost, adding an ADB rider may be worthwhile for the peace of mind it provides.

The amount you can access through an ADB rider varies, typically ranging from 25% to 100% of your death benefit. The specific percentage depends on your insurer and policy. The money received through the rider is usually a lump-sum payment that you can use for any purpose, such as paying for medical treatment, hiring an at-home nurse, or covering travel expenses. However, any amount withdrawn through the ADB rider will generally reduce the death benefit paid out to your beneficiaries when you pass away.

To access an ADB rider, you will need to meet certain qualifying conditions specified by your insurance company. Typically, this involves being diagnosed with a serious illness or injury, which may include terminal, chronic, or critical illnesses. Some insurers may also allow ADB riders to be activated if you need to go into a nursing home. It is important to understand the specific qualifying conditions and requirements set by your insurer before accessing this benefit.

Return of premium riders ensures a policy payout if you outlive a term policy

Term life insurance policies offer coverage for a set period, such as 10, 20, or 30 years. Once the term ends, the coverage ends unless the policy is renewed or converted to a permanent option. Term life insurance does not come with a cash value savings component, but insurers often offer living benefit rider options.

Return of premium (ROP) riders are an optional provision you can add to your term life insurance policy. They are a financial safeguard for those who wish to secure their monetary contributions during the policy's effective period. Essentially, they function as a form of savings in addition to being a protective measure, ensuring you'll either receive a death benefit payout or receive your premiums back if you outlive your term.

The primary benefit of an ROP rider is that if you outlive your term policy, the insurance company will refund all the premiums you paid during the term. If you don't use the insurance (i.e., you don't die), you get your money back. The ROP rider may help provide peace of mind that the money spent on premiums will not be "lost" if the policy does not pay a death benefit.

The exact benefits and how they are realized can vary based on the specific terms of your policy and the practices of your insurance provider. It's important to understand the potential drawbacks before making a decision. Adding an ROP rider to a term life insurance policy usually increases the premium cost.

Whether a return of premium rider makes financial sense depends on the likelihood that the policyholder will invest the money elsewhere at a higher return. It also depends on individual financial goals, risk tolerance, and policy duration. For policyholders who can invest in tax-deferred or tax-free accounts and are comfortable with the ups and downs of the stock market, a basic term policy without the rider probably makes more sense. Risk-averse policy owners, however, may find the return of income rider with its guaranteed rate of return more appealing.

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