Although life insurance is typically used to help your loved ones after you pass away, it can also help them (and you) before that time by providing living benefits.
Life Insurance with Living Benefits
Term life insurance protects you for a certain period of time, known as the term. If you pass away during that period, it will provide funds to your beneficiary (or beneficiaries).
For term life, there are many living value options:
Accelerated Death benefits that are paid out more quickly. When you are diagnosed with a terminal disease, this living benefit pays out a part of your term life policy. This provides you with much-needed funds for medical bills, loan repayment, and other expenditures. Many people use the money to go on a dream holiday or create other memories with their loved ones.
When it comes to this living advantage, keep the following four factors in mind:
When it comes to when you can access the money, different insurers have different life expectancy timelines.
Before you can get the living benefit, the program will need to be in effect for a certain period of time.
The part of the accelerated death benefit that you use can be subject to interest charges.
After you pass on, the advance payment is usually deducted from the overall amount your beneficiaries get.
A “critical illness rider” is a variant on this option that allows you to access your death benefit if you’re diagnosed with a particular disease or illness.
Refunded Premium: If you don’t die during the duration, all of your premiums will be refunded to you. This type of policy usually costs more than a standard term life insurance policy.
Disability waiver for premiums. If you have a long-term disability that lasts six months or more, you can use this living allowance to avoid paying the premiums. Although not a true cash advantage, it is a good choice to have because there is a three-in-ten risk that you will be disabled for 90 days or longer at any point during your working career.
Permanent life insurance, like term life insurance, provides a death benefit as well as the opportunity to build cash value tax-deferred, which a term policy does not. As with term life insurance, certain permanent life insurance plans allow you to receive accelerated death benefits.
In addition, permanent life insurance allows you to access funds in four essential ways during your lifetime:
Cash Value Withdrawal A withdrawal gives you access to a part of your permanent life insurance policy’s cash value. If the amount you withdraw is less than or equal to your insurance fees, you won’t have to pay any taxes on this withdrawal. If any part of the money you take out comes from interest, dividends, or capital gains, you’ll have to pay taxes on it. Also, keep in mind that if you don’t pay back the money you took out, it will be deducted from your policy’s death benefit.
Policy Loan. If you take out a loan against your permanent life insurance policy, you’ll be paying interest, but it’ll normally be cheaper than what other lenders will charge. You won’t be subjected to a credit review or a long list of requirements.
Policy Surrender. When you terminate your permanent life insurance policy, you can access the cash value part as a lump sum payment. The sum will be given to you, less any outstanding loans and/or unpaid premiums, from the insurer.
Long Term Care Benefits. Adding a long-term care option to your permanent life insurance policy allows you to use the death benefit to pay for long-term care costs not covered by your health insurance. The cost of the long-term insurance that you use is usually deducted from your death benefit. When you know that 70% of people turning 65 today would need long-term care at some point during their lives, it’s a valuable living benefit to have.