Life insurance provides peace of mind, but it can also provide more. Learn about life insurance policy benefits beyond the death benefit.
Accelerated or “Living” Benefits1 ─The primary purpose of life insurance is to provide death benefit protection. But many policies allow you to tap into the policy’s value to help pay expenses while you’re living, such as for serious illnesses, disabilities or injuries that may require extensive medical care. The fact is, these accelerated benefits or living benefits provide protection for you while you’re still alive.
Cash Value and Cash Surrender Value ─ Two very different things: cash value is what your policy is worth at any given moment as it builds cash value. That’s one of the benefits of “permanent” life insurance – the ability to accumulate cash value within the policy. However, it’s intended for long-term accumulation so during the early years of the policy a surrender charge is applied if cash is withdrawn from the policy, or if the policy is fully “surrendered”. Cash surrender value is the amount you could withdraw from your policy after surrender charges are applied. It’s important to know that if you withdraw all the available cash value, it will cause the policy to lapse and you will lose the coverage. Even withdrawing most of the cash may make it so your premiums will no longer support the policy, so it’s best to plan how you might use the cash value and talk to your agent to see how it will affect your policy. Neither of these should be confused with face amount (see below).
Dividends ─ Traditional whole life insurance products often pay these to policy owners, normally once per year. Companies are quick to say they’re never guaranteed. But when issued, you can take dividends in cash or use them to help pay policy premiums or add more coverage.
Face Amount ─ This is the same as the stated death benefit of a life insurance policy when it is issued (i.e., $50,000), and generally what beneficiaries will receive tax-free at the insured’s death.2 Some policies are structured so that premiums, dividends or cash value can increase the death benefit, so the death benefit paid to beneficiaries will likely be more than the original face amount applied for. Face Amount is not cash value or cash surrender value (see above).
Withdrawals and Loans ─ Most policies that build cash value also let you access some of it without losing any coverage. As mentioned above, you are able to withdraw some of the available cash value in your policy if needed. Loans are just that: you take money to use for whatever you want. Depending on the interest rate of the loan, and what the cash value of your policy is earning, you may not need to pay back the loan, but it will reduce the death benefit and available cash value of the policy. Also, just like withdrawals, excessive loans could put the policy at risk of lapsing. To keep the full amount of death benefit it’s usually recommended to pay loans back giving you a source for future loans.The other good news is you’re just paying back into your own policy’s cash value.
Paid-Up Option and Paid-Up Insurance ─ Just as it sounds, a particular type of life insurance called whole life offers ways to fully fund some or all of your coverage sooner than later. It’s much like you would pay-down your home mortgage earlier than scheduled, so that you end up saving money in the long run. Similarly if you pay more premium early into your policy you may pay less over the life of the policy.
Rider ─ A rider is added to an insurance contract to supplement, change or otherwise alter the policy in some way, typically to provide more protection or different types of protection in the event of disability, unemployment or other risks. They may be available with no additional premium, or they may incur a charge. They’re usually optional and may not be available in all states or on all policies.
For more information on understanding life insurance policy benefits and extras, see Part 1 of the Understanding Life Insurance series. Or, get in touch with a financial professional.
1Living 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.
2Internal Revenue Code § 101(a)(1). There are some exceptions to this rule. Please consult a qualified tax professional for advice concerning your individual situation.