Life insurance with “living benefits” can help in tough times.
Ironically, this overview of life insurance benefits designed to improve the quality of your life may take on a slight morbid tone in places. But bear me out.
This is about the ins and outs of living benefits,1 which are features available on many permanent life insurance products that give you access to death benefits or cash value while you’re still alive.
Living benefits have been around in various forms for decades. Although about 35% of life insurance owners say they bought it to “cover burial and other final expenses,” even more─about 44%─said they hope to use it for income or expenses well before that, according to LIMRA. 2
Paying a tax-free death benefit 3 is a life insurance policy’s primary purpose, but it can do just as much good through living benefits.
Some living benefits let you take some (or all) death benefit proceeds if you get severely sick or injured, and others simply let you take cash value from the policy if it’s sufficiently funded to help pay for certain expenses.
Because they work when they’re most needed, living benefits have proven extremely helpful to policy owners as a go-to source for emergency money. As such, they are now also important features on many Indexed Universal Life (IUL) insurance products─an increasingly popular type of permanent life insurance protection.
Using Death Benefits While Living
Being able to access the death benefit of a policy while living is accomplished by accelerated benefits riders, which are optional, no-additional-cost features that allow you to access all or part of the death benefit while you are living if you experience a qualifying terminal, chronic, or critical illness.
You can use living benefits for just about any purpose in most states. 4 Check with your financial professional for specifics on your policy, but typically living benefits can be used to help pay for:
- Household expenses
- Home modifications
- Nursing home care
- Adult day care
- Routine bills, like utilities
- Quality of life expenses
- Your dream vacation
You can choose several ways to receive living benefits:
- Request a full acceleration during your lifetime, or
- Receive a portion of your death benefit during your lifetime and leave the remaining portion to your beneficiary.
Qualifying for Living Benefits
This where it may be a little graphic for some. But it’s necessary to show how comprehensive and useful living benefits can be when things are at their worst.
There are the three basic categories typically used to qualify policy owners for living benefits.
1. Terminal Illness
Generally, if you have been diagnosed by a doctor with a terminal illness that will result in death within a certain time period.
2. Critical Illness
Usually following a brief qualification period after the policy is purchased, there certain critical illnesses that would qualify for living benefits, ranging from cancer to heart issues. Consult a financial professional to view a full list specific to certain insurers.
3. Chronic Illness
A chronic illness must be certified by a doctor within a certain time frame and would preclude you from daily living tasks, such as bathing, continence, and eating, among other depending on the policy.
These types of living benefits are something everyone, including your insurer, hope you never would have to use. But knowing they’re there for you if you need them can help make you sleep well at night.
Using Cash Value
Because an IUL policy’s value can grow tax-deferred through index crediting, it offers other types of living benefits to access cash value for more routine, and certainly less drastic, needs.
Cash value is different than the death benefit. If sufficiently funded, an IUL policy’s cash value can be accessed through loans and withdrawals 5 to help meet funding needs like:
- Paying for a financial emergency
- Reducing policy premiums
- Supplemental income
- As Collateral on a Loan
Loans are usually available after the policy has been in-force for about a year. Although it may be much longer before any significant cash value builds up, the amount available to lend usually caps at the policy’s cash value. The loan is charged a minimum interest rate, say 5%, but it could go up based on movements in a standard credit benchmark. It’s generally best to pay the loan back as soon as possible to ensure your policy stays sufficiently funded to support the death benefit and costs.
Policy owners often can withdraw a portion of cash value associated with the amount of insurance that is fully funded in the policy. Withdrawals don’t need to be paid back, that’s the good news. You’re limited in the amount you withdraw, however, and withdrawals lower your death benefit as well as risk increasing your future premium payments to keep the policy active.
Double Check Before Taking
Generally, there are many differences between using a policy’s living benefits and surrendering it altogether. Your financial professional can help you know the ropes, especially the impact of using living benefits on your IUL policy’s death benefit and tax situation.
With a powerful combination of death benefit protection and a unique method to grow cash value, today’s IUL has a growing role in the long-term financial plans for millions of Americans. But IUL with living benefits can also be a valuable resource to help meet many of life’s unplanned events, both big and small.
1 Living benefits are provided by no-additional premium accelerated benefit riders. Payment of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event, may affect your eligibility for public assistance programs, and may reduce or eliminate other policy and rider benefits. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social service agencies concerning how receipt of such a payment will affect you. Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.
2 Life Insurance Marketing and Research Assn. / Insurance Barometer Report “Life Happens” / Reasons for Purchasing Life Insurance, p. 38, 2019.
3 Internal Revenue Code § 101(a)(1). There are some exceptions to this rule. Please consult a qualified tax professional for advice concerning your individual situation.
4 The exception is that ABR proceeds for chronic illness in the state of Massachusetts can only be used to pay for expenses incurred for Qualified Long-Term Care services Qualified Long-Term Care services: The necessary diagnostic, preventative, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services that are required by a chronically ill individual and are provided pursuant to a plan of care prescribed by a licensed health care practitioner.
5 The ability of a life insurance contract to accumulate sufficient cash value to help pay expenses or meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. If remaining policy values and scheduled premiums are insufficient, additional out-of-pocket payments may be needed to keep the policy in force. Surrender charges may reduce the policy’s cash value in early years.