Life Insurance with Living Benefits
We have written in previous articles about the benefits of using Whole Life Insurance in a Life Insurance Retirement Plan (LIRP) and how you can accumulate enough wealth for a comfortable income stream that is tax-exempt.
But what happens if you don’t die but instead, get critically ill and are forced to live out the balance of your life in a nursing facility. Won’t that wipe out your assets and retirement plan?
It doesn’t have to. When you have purchased a Whole Life Insurance policy that includes living benefits, you can access a large portion of the death benefit without impacting the wealth accumulation.
Commonly labeled as an Accelerated Death Benefit, the living benefits are generally available for a terminal, critical, or chronic illness diagnosis.
What Types of Policies offer Living Benefits?
Although in this article we’ll be discussing Whole Life Insurance with living benefits, it’s important to acknowledge that living benefits (either part of the core coverage or added via endorsement) are also available (depending on the insurance company) on universal life insurance and term insurance policies.
It’s also important to note that life insurance companies vary as far as the terms and conditions of their insurance contracts and endorsements that are offered.
Knowing this, it’s critical that you make certain your agent provides the details of the accelerated death benefit (living benefits) of any insurance policy you are considering.
How does Life Insurance with Living Benefits Work?
Living benefits are generally added to a life insurance policy as a rider. In most cases, the living benefit rider is offered at no additional cost and many companies automatically add these benefits.
You may, however, pay a fee to the insurance company if or when you file a claim to activate the rider. This fee is typically deducted from the initial benefit payment. Moreover, living benefits are payable to the named insured and not the beneficiary.
To activate the living benefit rider, the insured must offer proof that the diagnosed illness qualifies for coverage. Typically, there are three illness groups that qualify for living benefits.
- Chronic Illness Rider – A chronic illness rider is an additional benefit that provides the policyholder with the option to access a portion of the death benefit if they are diagnosed with a chronic illness and are unable to perform certain activities of daily living or require substantial assistance with medical care. This rider offers financial support to help cover the costs associated with ongoing medical treatment, long-term care, or modifications to living arrangements. By utilizing the chronic illness rider, the policyholder can receive a portion of the death benefit while they are still alive, providing financial stability and flexibility during a challenging period.
- Critical Illnesses Rider – A critical illness rider is also an additional feature that provides the policyholder with a lump sum payment if they are diagnosed with a specified critical illness covered by the policy. These illnesses typically include major conditions such as cancer, heart attack, stroke, organ transplantation, or terminal renal failure. The critical illness rider offers financial assistance during a time of significant health challenges by providing funds that can be used to cover medical expenses, seek specialized treatments, pay for necessary lifestyle adjustments, or alleviate financial burdens.
- Terminal Illness Rider– A terminal illness rider is an additional feature that provides the policyholder with the option to receive a portion of the death benefit in advance if they are diagnosed with a terminal illness and have a limited life expectancy, typically 12 to 24 months. This rider offers financial support during a challenging time by allowing the policyholder to access funds to cover medical expenses, seek specialized treatment, and fulfill personal wishes.
- Cost of Living Rider – A cost of living rider is an optional add-on that helps protect the policy’s death benefit against the impact of inflation over time. It provides a mechanism to increase the coverage amount periodically to account for the rising cost of living. By adding this rider, the policyholder ensures that the death benefit keeps pace with inflation, allowing beneficiaries to maintain their standard of living and cover their financial needs even as prices and expenses increase.
- Long-Term Care Rider – The long-term care rider is an important benefit that provides coverage for expenses related to long-term care services, such as nursing home care, assisted living facilities, or in-home care, if the policyholder becomes unable to perform certain activities of daily living or requires substantial assistance due to a chronic illness or disability. This rider offers financial support to help cover the high costs of long-term care, which can quickly deplete savings and impact the policyholder’s financial security.
How to file a claim for Living Benefits
Again, insurance companies vary on what illnesses or injuries qualify for living benefits but they generally operate similarly on how a claim is filed.
After a qualifying diagnosis has been recorded by the physician, the insured will file a claim with the life insurance company to receive an advance of the death benefit. There is no requirement to repay the advanced death benefit since the advancement will be deducted from the death benefit when the insured passes.
Certainly, the insurance company will require certain documentation from the medical professional who made the diagnosis to determine that it meets the medical requirements to trigger the claim payment.
Moreover, the amount of the advance of the death benefit will depend on the insurance company you have selected and is typically a different amount depending on whether your illness or injury is considered terminal, critical, or chronic.
Will a claim for Life Insurance with Living Benefits impact the Cash Value?
Although an insured can withdraw funds from their cash value account to use for medical expenses related to a terminal, critical, or chronic illness, a claim against the living benefits rider will not impact the cash value of the insurance policy.
In fact, the cash value will continue to earn interest each year the policy remains in force just as if no claim had been filed.
As we mentioned earlier, the advance on the insured’s death benefit does not have to be repaid because the money will be deducted from the death benefit payable to the beneficiary or beneficiaries.
What are the tax consequences, if any, for receiving Living Benefits?
Generally, any advance you receive from the death benefit in your life insurance is not considered income and therefore not a taxable event. However, the IRS does has an exclusion for any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured is a director, officer, or employee of the person; or has a financial interest in the person’s business.
This exception can be found in Publication 17 on page 89.
The Bottom Line
There’s no doubt that having a Plan B in your retirement planning is a good thing. The living benefits in a life insurance policy serve as a much-needed source of capital if the insured is diagnosed with a terminal, critical, or chronic illness.
This capital can make a huge financial difference when dealing with monumental healthcare costs and at the same time, keep your LIRP intact and earning the wealth you’ll need if disabled or retired.
Frequently Asked Questions
What are living benefits in a life insurance policy?
Living benefits in a life insurance policy refer to optional features or riders that provide policyholders with the ability to access a portion of their death benefit while they are still alive if they experience certain qualifying events, such as a critical illness, chronic illness, or terminal illness.
What are the advantages of life insurance with living benefits?
Life insurance with living benefits offers several advantages. It provides a financial safety net in the event of critical, chronic, or terminal illnesses, allowing policyholders to cover medical expenses, seek specialized treatments, or fulfill care needs. It can also provide peace of mind, knowing that there are funds available to address unforeseen health challenges.
Can living benefits affect the overall death benefit of the policy?
Yes, accessing living benefits may reduce the overall death benefit of the policy. When a policyholder utilizes living benefits, the amount paid out for qualifying events is subtracted from the total death benefit. It is important to carefully consider the impact on the remaining death benefit and consult with an insurance professional before making any decisions.
Are living benefits available in all life insurance policies?
No, living benefits are typically offered as optional riders that can be added to a life insurance policy for an additional cost. Not all policies automatically include living benefits, so it’s important to discuss and request these features when purchasing a life insurance policy.
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