5 Questions to Ask About Living Benefits

Life insurance has lots of options. Once you decide the kind of policy you want, you can explore what riders, or additional coverage, you want to add to your policy.

With some policies living benefits are automatically included; with others you have to add them with riders.

Here are answers to five questions about living benefits:

• What are living benefits of life insurance?
• What type of life insurance policies have living benefits?
• What are the pros and cons of living benefits?
• What should you consider when adding living benefits to a life insurance policy?
• What should you consider when deciding to use living benefits?

What are living benefits of life insurance?

Living benefits are funds that can be accessed while living. Living benefits include the cash value of a policy, accelerated death benefit riders, and even premium waivers.

Cash value is only available with permanent life insurance policies. Depending on the terms of your policy, you can borrow against the cash value or use it for living expenses during retirement.

Accelerated death benefit riders allow policyholders to access part of the death benefit early in the event of a terminal illness, critical illness, or chronic illness. Be sure to understand the terms of the rider and how it works before adding it.

Brian Greenberg, True Blue Life Insurance Founder and CEO
“Part of the definition of accelerated death benefits, or ADB, is the terminal illness rider. The terminal illness ADB is a feature that is required by law in almost every state in the U.S. and is considered separate from other accelerated benefits. It is interesting why the terminal illness rider is required by law: People with terminal diagnoses were selling their life insurance policies for pennies on the dollar in what is called a viatical settlement. The practice of buying policies from terminal patients became predatory, and most state insurance departments began requiring it by law.”

Long-term care benefits can also be added. These benefits help pay the cost of long-term care in a facility. This rider can be more cost-effective than purchasing a separate long-term care insurance policy.

A disability premium waiver is a nice benefit to add because it allows you to keep your life insurance coverage without having to pay premiums.

Adding riders and other benefits can make premium rates increase. However, the additional coverage may make it worthwhile for some life insurance shoppers.

Sam Price, Assurance Financial Solutions Independent Agent
"An accelerated death benefit is a living benefit in nearly every life insurance policy now. In most cases, you don't even have to pay extra for that benefit. But only some companies make more living benefits available such as protection for cancer, heart disease, stroke, transplants, and even long-term care benefits to name a few."

As these living benefits have become more common, the rates have also lowered.

Jeff Root, Rootfin Insurance Blog Owner
“Over the last two years, life insurance policies with living benefits rates have come down substantially as more carriers enter the field. If you're comparing rates for term life insurance, it can be only 10–20 percent more expensive (depending on the company) to buy a policy that has living benefits — meaning you can access the death benefit in case of a critical illness like cancer, heart attack or stroke. That's so much more peace of mind for very little additional cost.”

What types of life insurance policy has living benefits?

While some living benefits, like cash value, are only available with permanent policies. It’s possible to find term life policies with accelerated death benefit riders and disability premium waivers.

John Holloway, NoExam.com
“All types of policies can have living benefit riders added. In regard to term life insurance, it is usually in the form of riders that can be added on for a small increase in premium. Permanent life insurance offers cash value which provides other living benefits such as tax deferred growth and access to cash later in life.”

When looking at accelerated death benefit riders, be sure to understand what the definitions are for qualifying for an accelerated benefit.

Laura Donovan, Sonder Financial Founder
"Many companies now have riders for Terminal Illness (a diagnosis with typically 1 or 2 years life expectancy) Chronic Illness (you need help completing basic daily activities, or are maybe diagnosed with Alzheimer's or dementia) and some have riders for Critical Illness (life threatening diagnoses like cancer, heart attacks, strokes, ect.) While these are becoming more common across permanent insurance contracts, there are some companies offering these benefits on even their term insurance contracts — which is great for clients. It’s important to look at the fine print for the different triggering events that are accepted, because they do vary from company to company. If you’re purchasing term insurance that offers these illness 'living benefits' — make sure the company’s term contract is convertible."

What are the pros and cons of living benefits?

Pros

Living benefits give you more options on how to best use your life insurance policy because they allow you to use the accrued cash value or accelerate some of the death benefit for qualified expenses.

Other living benefits, like disability premium waiver and guaranteed insurability riders, allow you to keep your coverage even when unexpected health challenges arise.

Experts on the pros of living benefits

Brian Greenber, True Blue Life Insurance Founder and CEO
“There are not many cons regarding living benefits. Insurance companies are adding these on to current products at meager, or no cost at all. The pros are that you can access your death benefit while you are alive. Living benefits are like lesser versions of a disability and long term care policy.”

John Holloway, NoExam.com
“The pros of living benefits is that they can provide relief at a time when you need it most. Riders can be added on to your policy to provide things like an accelerated death benefit, disability waiver of premium, or guaranteed insurability later in life.”

Mike Sosso, InsuranceSmart LLC Owner and Licensed Life Insurance Agent
“Structuring a policy with living benefits often increases the cost of the policy, but offers insured greater benefits and flexibility and often at a substantially lower price than purchasing two or three separate policies to cover all the same issues. As an example, a policy with a critical illness, chronic illness, or long term care accelerated death benefit rider provides the insured the option to take all or a portion of the death benefit to help with needed expenses incurred in the event of a qualifying chronic illness, critical illness, or long term care need at a fraction of the cost of purchasing each of these polices separately."

Cons

Monthly premiums increase the more riders you add to a life insurance policy. Be aware of the price difference and determine whether the additional coverage offered in exchange is worth it for your situation. In some situations, it is.

In addition to higher premiums, any portion of the death benefit that is accelerated will not be received by your beneficiaries. Be mindful when accelerating your benefit so that your immediate needs can be met and your beneficiaries future needs can also be met.

Experts on the cons of living benefits

Chane Steiner, Crediful CEO
“Depending on where you live, you may be subject to taxation on the benefit received. You may have to pay a fee depending on the insurance company.”

Randy VanderVaate, Funeral Funds Owner and CEO
“Living benefits are not disability insurance and are not a replacement for disability insurance. The living benefits are deducted from the face value of the insurance policy, reducing the insured’s death benefit. Your insurance company may also limit the amount that may be withdrawn from your policy (example: 50 percent for the critical illness, and 50 percent upon death).”

Mike Sosso, InsuranceSmart LLC Owner and Licensed Life Insurance Agent
“There is a downside of bundling critical illness, chronic illness, or long term care accelerated death benefit riders into one policy. When you exercise the accelerated death benefit rider, the death benefit always reduces equal to or in some cases greater than the amount of the accelerated benefit taken. This in some instances can even eliminate the death benefit entirely. The accelerated death benefit, however, can typically be taken as a partial against the total face amount to leave you a residual amount to pay out at the insured’s death.”

What should you consider when deciding to add living benefits?

 Consider the following four factors before purchasing life insurance with living benefits:

• Family health history
• Current health
• Occupation risks
• Existing coverage
• Future constraints
• Policy terms

Family health history

John Holloway, NoExam.com
“Something to consider would be family medical history. If both parents have passed away from the same terminal illness, then you might have a higher chance of the same. An accelerated death benefit would be nice to have if you were someday diagnosed with a terminal illness.”

Current health

Mark Charnet, American Prosperity Group Founder and CEO
"The number one item is the proposed insured’s insurability, as the policy’s premium is based on this. In fact, an applicant may be accepted for the life insurance portion and denied an Living Benefits Rider (LBR) for long-term care (LTC), as an example. Bone cracks or other osteoporosis symptoms may deny the applicant the LBR, yet life expectancy would be unaffected by this and the offer from the underwriting team may be a standard rating or better."

Occupation risks

John Holloway, NoExam.com
“If your occupation is somewhat dangerous, then the disability waiver of premium rider would allow you to avoid paying premiums while disabled. This is something to consider if there is any chance that you could become disabled.”

Existing coverage

Brian Greenberg, True Blue Life Insurance Founder and CEO
“Adding living benefits to your insurance policy is worth it if you meet two requirements. One, the price difference is minimal. Two, you do not already have a disability, critical illness, or long term care policy.”

Randy VanderVaate, Funeral Funds Owner and CEO
“People should consider their existing life insurance benefits and disability insurance benefits before deciding if they need living benefits included in their insurance policy. As long as the rates are competitive between two different carries, it is wise to get a plan that provides living benefits.”

Future constraints

Jason Fisher, BestLifeRates.org, LLC
“One may want to consider if having access to living benefits means they forego other coverage. For example, is a person has access to a living benefit, it may require them to "spend down" the benefit first before being able to submit a claim to certain health insurance plans.”

Gordon E. Conwell, III, Americanterm.com
"Knowing how each company pays out living benefits prior to purchasing makes sense, so that you’re not unpleasantly surprised later…most companies offer a discounting method of paying out the chronic and critical living benefits. I suspect many people are going to be unhappy later with this discounting method of getting living benefits if/when they make a living benefit claim someday since I suspect no one is going to get the full amount they request on a living benefit claim under this discounted method, but regardless of the amount you get, your policy will still be reduced by the original amount requested."

Policy terms

Virginia Hamill, FitSmallBusiness.com Senior Insurance Analyst
"Some insurers offer these riders at an additional cost; others automatically include them in the policy, although you have to imagine the expense is baked into premium for those. Plus, using your living benefits rider can come with costs. Insurers often charge administrative fees, and some states charge tax on the benefits. There is no federal tax on living benefits."

How and when should living benefits be used?

Living benefits can only be used according to the terms outlined in the policy. It’s important to understand these terms before accessing any living benefit, especially when accelerating the death benefit.

Ben Glancz, Financial Representative
“If you plan on tapping into the living benefit option of your policy, you need to know what the ramifications will be on your death benefit, and what expenses you won’t be able to pay for because of this.”

Policyholders can choose to accelerate some of the death benefit when the insured person has a terminal, chronic, or critical illness depending on the terms of the rider. Medical treatment and hospice care can be quite expensive in these cases, so being able to access additional funds is valuable. It makes it easier to seek treatment because there is protection from debt.

When accessing these funds, it’s important to weigh future expenses with immediate expenses.

Matt Schmidt, Diabetes 365
“While living benefits on a life insurance policy sounds great initially, many people forget that the amount a person accelerates while living, will offset the original amount of the life insurance. Many people take out a policy, for a specific financial reason. If a person 'dips' into their policy after suffering from a major health issue, and then passes away, it could leave their family without the proper amount of life insurance they need.”

Once you’ve received an accelerated death benefit payout, use those funds wisely.

Chane Steiner, Crediful CEO
“If you have medical bills to pay, pay them (but not without trying to negotiate). The rest, put it in a high yielding savings account (about 2 percent per month). You'll be dipping into it for your medical expenses, but at least you'll be receiving some interest on that money as you wait to need it.”

Are living benefits worth it?

Understanding what living benefits options are available and thinking critically about potential future needs will help you determine which ones you might want added to your life insurance policy. Weighing the pros and cons will also help you decide if a living benefit is worth adding to your policy. Always be sure that you understand the terms of your life insurance policy and how the living benefit can be used. These riders can be a good way to protect your family’s current in addition to their future financial security.