Life insurance with living benefits

Life insurance can be an uncomfortable topic, but it’s an important one, particularly if you have dependents or heirs. Making a financial plan for your loved ones can help ensure that they can not only cover your end of life and funeral costs, but handle any outstanding debt. What you may not realize is that life insurance can also help you with expenses while you’re still alive. Living benefits are typically optional, but may be worthwhile to consider. Bankrate has put together this guide on living benefits to help you understand what additional options are available when shopping for life insurance.

What are living benefits in life insurance?

Living benefits are exactly what they sound like: benefits in a life insurance policy that you can make use of while you are still alive. Some living benefits are in the form of your policy’s accumulating cash value, while others are optional add-ons, also called riders, that expand the coverage of your standard policy. 

Types of life insurance living benefits

Depending on the type of life insurance policy you own, you may have access to various living benefits. Below are some of the most common types of living benefit options.

Cash value

If you buy a permanent life insurance policy (as opposed to a term policy), a portion of your premiums will build cash value over time. The type of permanent policy you purchase will determine how the money grows.

• Whole life insurance (WL): Cash value grows at a fixed interest rate.
• Universal life insurance (UL): Cash value grows at rates declared by the insurer, and includes a guaranteed minimum rate.
• Indexed universal life insurance (IUL): Cash value growth is linked to a stock market index, such as the S&P 500.
• Variable universal life (VUL): Allows policyholders to diversify their cash value into multiple sub-accounts, including money market funds, bonds and stock portfolios.
• Variable life insurance (VL): Cash value is invested in subaccounts, typically tied to stock and bond funds.

Regardless, you have the option to use that cash value while you are still alive. Here are some options that may be available to you.

• Insurance premiums: On certain policies, you may have the option to use your earned cash value to pay your premiums if you have accrued enough.
• Loan: You could use your cash value as a loan. You will need to repay that money and any applicable interest, or it may be deducted from your death benefit.
• Complete surrender: You have the option to completely surrender your policy to get your cash value as a lump sum. If you exercise this option, you will lose your death benefit for your beneficiaries and any other life insurance living benefits attached to your policy. You may also be required to pay a surrender charge depending on how long your policy has been in force. Most surrender fees start at 100 percent of the value and decrease every year. After 10+ years, the surrender charge will eventually reach 0 percent.

There may be restrictions on how and when you can use the cash value in your policy. For example, you may have to wait until your policy has been in place for a certain number of years before you are able to access your cash value.

Riders

There are additional types of living benefits that can be added to life insurance policies. Riders broaden your insurance coverage beyond the standard policy terms. Although this is by no means an exhaustive list, these riders are commonly offered by life insurance companies.

• Accelerated Death Benefit Rider: With this rider, certain qualifying events would allow you to access some of your death benefits if you’re diagnosed with a terminal illness.
• Chronic Illness Rider: This supplement allows the policyholder to access a portion of the death benefit if they are diagnosed with a chronic illness.
• Critical Illness Rider: You may be able to draw funds from your death benefit to cover medical costs for certain serious but non-terminal events, such as a heart attack or stroke, if you have this rider.
• Long-Term Care Rider: Usually reserved for permanent policies, this living benefit rider allows you to use some of your death benefit to cover the cost of long-term care.
• Disability Income Rider: This rider could pay out a monthly income if the policyholder becomes disabled for a predetermined period of time.
• Premium Waiver for Disability Rider: With this optional rider, if you are diagnosed with a long-term disability (usually one that lasts six months or more), a portion or full amount of your premiums are covered while the disability persists. On term and whole life policies, the waiver of premium rider pays the full premium. On UL, VUL and IUL, the rider typically covers the cost of insurance and expenses.
• Return of Premium Rider: If you do not pass away before the term expires, this rider is the only way to get back the premiums that you paid into the policy.

Limitations of living benefits

There are pros and cons to accessing living benefits. As with any policy decision, it’s helpful to discuss your personal situation with an agent who can offer advice based on a holistic understanding of your needs. However, generally speaking, here are some of the potential limitations of living benefits coverage. 

• Reduction in death benefit: If you take out cash benefits or tap into certain riders, your ultimate death benefit amount may be reduced.
• Tax consequences: As long as your policy meets IRS 7702 standards, you won’t have to pay taxes on a withdrawal. However, if your current cash value can’t pass the cash value accumulation test, your withdrawal will be taxed.
• Potential for policy erosion: If you’re taking out policy loans and not paying back the amount, the interest owed will accrue and compound. It’s possible that the growing balance will deplete the policy’s cash value and your coverage terminates potentially with a phantom income tax gain.
• Waiting periods: You may have to pay into your policy for a certain number of months or years before you can tap into living benefits.
• Inability to add riders to existing policies: Depending on the terms of your policy, you may not be able to add riders to a policy already in force.
• State availability: Some riders are not available in all states, or terms may vary by state. 

Frequently asked questions

• How much does life insurance cost? The cost of life insurance varies due to several factors. You might pay more or less than the average premium based on everything from your age and health to your occupation. For example, some jobs have more inherent risk than others and a carrier may increase your premium as a result. The type of policy you purchase will also affect your life insurance costs. Permanent policies cost more than term policies on average. If you decide to purchase a living benefits rider or other add-on coverage, you can also expect an added cost on top of your base premium.
• What is the cost of a living benefit rider? The cost of a living benefit rider can depend on several factors, such as the type of rider, your age, coverage amount and health. For example, a disability income rider’s cost is primarily heavily influenced by your occupation. Meanwhile, life insurance companies often include an accelerated death benefit rider at no charge. If a rider does require an extra fee on top of your base premium, it’s typically minimal.
• Should I get a policy with living benefits? It depends on your budget and your anticipated needs. Living benefits riders typically add to your monthly premium, so you might first want to make sure they fit into your budget. However, the pros of living benefits can be substantial. You could gain access to a loan during an emergency or be able to apply some of your death benefits to long-term care if you become disabled or chronically ill. An agent can walk you through the potential benefits given your unique situation, including your age.