Life insurance is a crucial financial tool that provides protection and peace of mind to individuals and their families. While the primary purpose of life insurance is to provide a death benefit to beneficiaries after the policyholder’s passing, many policies now offer living benefits as well. Living benefits allow policyholders to access a portion of their life insurance coverage while they are still alive, providing financial support during times of need. This article seeks to explore the concept of life insurance with living benefits and discuss the advantages it offers.
What are Living Benefits?
Traditionally, life insurance policies only paid out a death benefit upon the insured person’s demise. However, with the introduction of living benefits, policyholders can access a portion of their policy’s death benefit while they are still alive under certain circumstances. Living benefits are designed to provide financial assistance to policyholders who experience a qualifying event such as a chronic, critical, or terminal illness.
Types of Living Benefits
- Chronic Illness Rider: This living benefit allows policyholders to access a portion of their life insurance with living benefit if they are diagnosed with a chronic illness. The funds can be used to cover medical expenses, long-term care costs, or any other financial obligations arising from the illness.
- Critical Illness Rider: With a critical illness rider, policyholders can receive a lump sum payment if they are diagnosed with a covered critical illness such as cancer, heart attack, stroke, or organ failure. The funds can be used to cover medical treatments, experimental therapies, or even everyday expenses while recovering.
- Terminal Illness Rider: This rider provides policyholders with a portion of their life insurance benefit if they are diagnosed with a terminal illness and have a life expectancy of typically one to two years. The funds can be used to alleviate financial burdens, fulfill final wishes, or support loved ones during a difficult time.
Advantages of Life Insurance with Living Benefits
- Financial Flexibility: Living benefits allow policyholders to access funds when they need them the most. The additional financial support can help cover medical bills, loss of income, debt payments, or any other unexpected expenses that arise due to an illness.
- Peace of Mind: Knowing that a life insurance policy offers living benefits can provide peace of mind to policyholders and their families. It ensures that there is a safety net in place to address financial challenges resulting from a serious illness.
- No Taxation: In most cases, living benefits received from a life insurance policy are tax-free. This means that policyholders can use the funds without worrying about additional tax liabilities.
- Customizable Coverage: Policyholders have the flexibility to choose the type and amount of living benefits coverage that best suits their needs. They can tailor the policy to match their health condition, financial situation, and family circumstances.
- Legacy Protection: Even with the living benefits accessed, a life insurance policy can still provide a death benefit to beneficiaries upon the policyholder’s passing. This ensures that loved ones are financially protected and can continue their lives without significant financial strain.
Which type of life insurance provides living benefits?
Many insurance policies now provide living benefits, which allow policyholders to access a portion of their coverage while they are still alive. If you’re considering life insurance with living benefits, it’s important to understand the different types of policies available.
Permanent Life Insurance
Permanent life insurance, such as whole life or universal life insurance, is a type of policy that provides coverage for the policyholder’s entire lifetime, as long as premiums are paid. These policies typically have a cash value component that grows over time. With permanent life insurance, living benefits can be accessed through policy loans or withdrawals from the accumulated cash value.
Whole Life Insurance
Whole life insurance provides a guaranteed death benefit and a cash value component that accumulates over time. Policyholders can access the cash value through policy loans, which are tax-free and do not require repayment. However, outstanding loans will reduce the policy’s death benefit.
Universal Life Insurance
Universal life insurance offers flexibility in premium payments and death benefit amounts. It also accumulates cash value. Policyholders can access the cash value through withdrawals or policy loans, subject to certain terms and conditions. Again, any outstanding loans will reduce the death benefit.
Indexed Universal Life Insurance
Indexed universal life insurance (IUL) is a form of permanent life insurance that provides a death benefit and the opportunity to earn returns based on the performance of a chosen stock market index, such as the S&P 500. IUL policies typically have a cap on the credited interest rate and a minimum guaranteed interest rate. Living benefits can be accessed through policy loans or withdrawals from the cash value component.
Term Life Insurance with Living Benefits Riders
Term life insurance provides coverage for a specific term, typically 10, 20, or 30 years. While term life insurance policies don’t typically offer built-in living benefits, some insurers offer living benefits riders that can be added to the policy for an additional cost. These riders provide living benefits in the event of a qualifying chronic, critical, or terminal illness diagnosis.
Chronic Illness Rider
This rider allows policyholders to access a portion of the death benefit if they are diagnosed with a chronic illness and meet certain criteria.
Critical Illness Rider
With a critical illness rider, policyholders can receive a lump sum payment if they are diagnosed with a covered critical illness specified in the policy.
Terminal Illness Rider
The terminal illness rider provides an accelerated death benefit if the policyholder is diagnosed with a terminal illness and has a limited life expectancy.
What is the difference between living benefits and death benefits?
These benefits are typically triggered by qualifying events such as chronic illness, critical illness, or terminal illness. The purpose of living benefits is to provide financial support to policyholders during times of need, helping them cover medical expenses, long-term care costs, or other financial obligations arising from the specified events. Living benefits provide policyholders with flexibility and peace of mind by offering access to funds when they require them the most.
Death Benefits: Death benefits, also known as a life insurance payout or the face amount of a policy, are the primary purpose of life insurance. Upon the death of the policyholder, the insurance company pays out a lump sum to the beneficiaries named in the policy. The death benefit provides financial protection to the loved ones left behind, helping them cope with the loss of income, funeral expenses, debts, and other financial obligations. The death benefit is typically paid tax-free to the beneficiaries and is often used to ensure the financial stability and security of the deceased’s family.
- Timing: Living benefits are accessed by policyholders while they are still alive, providing financial assistance during specific qualifying events. In contrast, death benefits are paid out to beneficiaries after the policyholder’s death.
- Purpose: Living benefits are designed to address the policyholder’s financial needs during critical or challenging times, such as covering medical expenses or long-term care costs. Death benefits aim to provide financial protection and support to the policyholder’s beneficiaries after their passing, helping them maintain their standard of living and meet financial obligations.
- Availability: Living benefits are dependent on the specific provisions included in the life insurance policy. Not all life insurance policies offer living benefits, and the availability of living benefits may vary based on the policy type and insurance company. On the other hand, death benefits are a standard component of all life insurance policies.
- Beneficiaries: Living benefits are accessed by the policyholder themselves, providing financial support directly to the insured individual. In contrast, death benefits are paid out to the beneficiaries named by the policyholder in the policy document.
- Taxation: Living benefits may or may not be subject to taxation, depending on various factors such as the policy terms and the specific event triggering the benefits. Death benefits, in most cases, are paid out to beneficiaries tax-free, providing them with the full benefit amount.
Both living benefits and death benefits serve important purposes within a life insurance policy. Living benefits offer policyholders financial support during their lifetime, while death benefits provide financial security to beneficiaries after the policyholder’s death. It’s essential to review and understand the terms and provisions of a life insurance policy to determine the availability and extent of both types of benefits.
What are the two 2 types of death benefits?
In the context of life insurance, there are two main types of death benefits:
Level Death Benefit
A level death benefit is the most common type of death benefit in life insurance. With a level death benefit, the payout remains constant throughout the duration of the policy. If the insured person passes away during the policy term, the beneficiaries will receive the predetermined amount stated in the policy, regardless of when the death occurs. This type of death benefit provides a fixed amount of financial protection and ensures that the beneficiaries receive a consistent payout in the event of the policyholder’s death.
Increasing Death Benefit
An increasing death benefit, also known as an escalating or graded death benefit, offers a death benefit that grows over time. This type of benefit is often found in policies that have a cash value component, such as permanent life insurance. The increasing death benefit is tied to the growth of the policy’s cash value, which accumulates over time based on premiums paid and potential investment returns. The death benefit increases gradually over the policy’s duration, providing additional financial protection as the policyholder ages. The beneficiaries receive the enhanced death benefit amount if the insured person passes away during the policy term.
Life insurance with living benefits offers a valuable combination of protection during life and financial support for loved ones after death. It provides policyholders with the peace of mind that their insurance coverage can be utilized during challenging times. By considering a life insurance policy with living benefits, individuals can safeguard their financial well-being while ensuring their family’s future remains secure.