Is Life Insurance With Living Benefits Worth It?
Life Insurance: Protecting Your Loved Ones and Beyond with Living Benefits
Life insurance is a powerful tool that offers more than just a death benefit. Did you know that life insurance can also provide financial security and tax advantages while you’re still alive? It can be used for emergency expenses, medical bills, and even supplement your retirement income. Life is unpredictable, and preparing for the unexpected is crucial. Let’s delve into the significant benefits of living benefits and how they can add value to your life insurance policy.
This blog will explain how to use it, its benefits, and if it is worth it. There are two types of living benefits: accelerated riders (part a) and building cash value (part b). We have included a Q&A section at the bottom of the blog for your convenience.
What is a death benefit?
When you pass away, your loved ones will receive the amount from your insurance company. They can use it for anything; bills, mortgage, college, and retirement.
What are living benefits?
Living benefits are additional features in life insurance policies that can be accessed by the policy owner while they are alive. They offer flexibility and can help alleviate financial burdens during challenging times. Two key types of living benefits are accelerated riders and building cash value.
What is cash value?
With permanent life insurance, you, in most cases, will likely have access to Cash Value. Cash Value accumulates over time and comes with tax advantages such as tax-deferred growth and tax-free cash value. The cash value can supplement retirement income, college savings, legacy, and long-term care.
Part A Which types of Life insurance policies have living benefits (accelerated riders)?
* possible with term, whole, universal, and index life insurance.
What are Accelerated riders?
Accelerated riders provide benefits if you are critically, terminally, or chronically ill. They allow you to receive a portion of your death benefit while still alive, providing financial relief during challenging circumstances. This can help cover medical expenses, treatments, and other costs associated with your illness. However, it’s important to note that the amount received through an accelerated rider may be subtracted from your death benefit, ultimately reducing the amount your beneficiaries would receive upon your passing. Most life insurance policies offer living benefits that you can use when you are still alive if you are critically, terminally, or chronically ill. Riders are additional options or benefits that allow you to customize your policy.
Are you prepared for an unexpected illness?
In the U.S., heart disease is the number 1 cause of death. Experts predict cardiovascular disease will grow exponentially globally over the next few years (heart.org). Approximately 39.5% of men and women will be diagnosed with cancer at some point during their lifetimes (cancer.gov). It’s natural to believe that unforeseen circumstances won’t happen to us. However, it’s always wise to be prepared for the worst rather than suffer the consequences of being unprepared. If you were to face an unexpected illness, your expenses would increase, your ability to work would decrease, and your income would suffer. This could put you in a difficult situation.
We understand that planning for a serious illness can be a daunting task. It’s not easy to face the possibility of needing medical care and the financial burden it can bring. That’s why an accelerated death benefit rider can be such a relief during this challenging time. It can help you access the care and treatment you need without depleting your savings or worrying about the future of your children’s education or retirement. We know that your health is a top priority, and we want you to be able to invest in it without added stress. This rider can also ease the burden on your loved ones, giving you all peace of mind. We hope this solution can comfort you and help you look forward to a brighter future.
By selecting this alternative, you have the opportunity to receive a portion of your life insurance while you are alive. However, it’s important to note that if you opt for this route, your beneficiary may receive a reduced amount in the event of your passing.
What types of illnesses are eligible for a living benefit?
- Chronic Illness: If you are unable to perform two out of six activities of daily living, you may be eligible for a living benefit. This rider typically pays a monthly benefit and is not part of long-term care insurance.
- Critical Illness: Conditions such as heart attack, stroke, cancer, end-stage renal failure, or major organ transplant may qualify for living benefits. You can receive some or all of your death benefit to help cover expenses related to the illness.
- Terminal Illness: This rider pays a benefit if you are diagnosed with a terminal disease and have a life expectancy of 12 to 24 months. The funds can be used for final expenses, experimental medicine, or fulfilling last wishes.
Having an accelerated rider added to your insurance policy is often affordable, with potential monthly costs ranging from $5 to $10, or sometimes no additional cost at all. The living benefits can be a lifeline in times of unexpected illnesses, providing financial support when you need it most. While health insurance covers certain aspects of medical care, living benefits offer an extra layer of protection and can be a valuable addition to your overall coverage.
How will you receive the living benefits?
If you have a qualifying illness, the insurance company will pay out the If you have a qualifying illness, the insurance company will pay out the benefit. The first thing you need to do is file a claim with your insurance provider. You might need to submit medical records showing your illness’s severity. Some insurance policies have a 30 to a 90-day waiting period before they pay out the accelerated benefits. The payout could be monthly, annually, or lump sum. There might be an administrative fee when receiving your payout, and your state might have some local taxes, but there are no federal taxes on your benefits.
Do you still need an accelerated rider if you have health insurance?
Most likely, your traditional health insurance doesn’t cover all the care you need if you get one of the three illnesses mentioned earlier. However, health insurance covers parts that an accelerated rider won’t, so adding a rider should never replace your health insurance. The best way to financially protect yourself and your family is to add extra protection to your policy.
Is it worth it?
- Many policies have them built in at no additional cost
- Sometimes you can use them as early as 30 days from the start date of the policy
- Also available if you have a term policy
- Money doesn’t have to be repaid
- It gives peace of mind
- May reduce money away from your death benefit
- Administrative costs
- Sometimes your premium will be slightly higher
- The amount you receive is based on the severity of your health illness
- It might be taxed locally
Not sure about adding an accelerated rider to your policy? Click here to schedule a meeting with one of our policy engineers to get more information or discuss other options, such as; disability insurance or long-term care insurance.
Part B; Building cash value with living benefits.
Whole and universal life insurance policies offer another type of living benefit—building cash value. Over time, your policy accumulates cash value, which co
mes with various advantages, including tax-deferred growth and tax-free access to cash value. This can be used to supplement retirement income, fund college savings, leave a legacy, or even cover long-term care expenses.
These funds can be used as a supplement for retirement income or help to achieve other financial goals such as:
1. Guaranteed, tax-deferred growth.
2. Collateral for policy loans
3. Dividend payments.4. Flexible funds for retirement
5. College savings.
6. Legacy opportunities.
7. Long-term care.
8. Tax benefits.
How can you use these living benefits?
- Cash value withdrawal lets you withdraw a portion of the cash value. You don’t have to pay taxes on the amount you take out if the amount is less than or equal to your premium payments.
- Policy loan. You can take out a loan with a lower interest rate than other lenders.
- Policy surrender: Canceling your policy to access your cash value. The insurer will pay your cash value minus the leftover premium and loans you took.
- Long-term care benefits. If you add a long-term care benefit to your whole life insurance policy, you can access your death benefit to cover long-term care expenses. Your death benefit will be reduced by the amount of the long-term benefit you used
These benefits allow you to withdraw cash value or take out a loan tax-free whenever needed. There are many situations where you might need some extra money. Maybe you need another investment for your business, your retirement is taking longer than expected, and you are running out of money, or you want to help your children pay for their college tuition.
Building cash value provides you with a tax-advantaged savings component within your life insurance policy. You can access the cash value through withdrawals or policy loans, without incurring taxes on the withdrawn amount, as long as it is less than or equal to your premium payments. However, it’s essential to remember that building cash value is associated with permanent life insurance policies, which are generally more expensive than term insurance.
Is it worth it?
- Money grows tax-deferred
- Withdraw money or take out a loan whenever you need
- Only permanent policies
- More expensive than term insurance
- Not yet available for self-enrollment
Determining the worth of living benefits depends on your individual circumstances, financial goals, and risk tolerance. While living benefits offer valuable advantages, there are considerations to keep in mind, such as potential reductions to your death benefit or administrative costs. To make an informed decision, consider speaking with a licensed policy engineer who can provide personalized guidance based on your specific needs.
Q: How does adding living benefits affect my life insurance premium?
A: In many cases, adding living benefits to your life insurance policy may not significantly impact your premium. Some policies include certain living benefits at no extra cost, while others may have a nominal fee associated with them. It’s best to consult with a licensed policy engineer to understand the specific costs and options available to you.
Q: Can I add living benefits to my existing life insurance policy?
A: Depending on your policy type and insurance provider, it may be possible to add living benefits to your existing life insurance policy. Contact your insurance company or a policy engineer to discuss the available options and any necessary policy modifications.
Q: Do I need to undergo a medical examination to qualify for living benefits?
A: The eligibility requirements for living benefits vary depending on the insurance provider and the specific rider. Some living benefits, such as accelerated riders for critical illness or terminal illness, may have specific medical criteria that need to be met. However, many living benefits do not require a medical examination. It’s advisable to review the terms and conditions of your policy or consult with a policy engineer to determine the requirements.
Q: Can I use living benefits if I have pre-existing conditions?
A: The availability of living benefits for pre-existing conditions can vary depending on the insurance policy and the specific conditions. While some policies may exclude certain pre-existing conditions, others may offer coverage or additional riders specifically designed to address those conditions. It’s important to review your policy or consult with a policy engineer to understand the coverage and limitations related to pre-existing conditions.
Q: Can I customize the amount of living benefits in my policy?
A: Yes, many insurance policies offer customization options for living benefits. You may have the flexibility to choose the amount of coverage for living benefits based on your needs and budget. It’s recommended to discuss your specific requirements with a policy engineer who can assist you in tailoring the coverage to suit your circumstances.
Q: Are the living benefits tax-free?
A: In general, living benefits received from a life insurance policy are tax-free. However, it’s essential to consult with a tax advisor or financial professional to understand the specific tax implications based on your individual situation and local tax laws.
Q: Can I cancel or modify my living benefits?
A: Depending on the policy and insurance provider, you may have options to cancel or modify living benefits. Keep in mind that making changes to your policy may have certain implications and could impact the overall coverage and premiums. It’s advisable to discuss any desired modifications with a policy engineer or insurance professional before proceeding.
Q: Can I have multiple living benefit riders on my life insurance policy?
A: In many cases, it is possible to have multiple living benefit riders on a life insurance policy. Different riders may provide coverage for various types of illnesses or circumstances. Consulting with a policy engineer can help you understand the available options and determine which combination of living benefit riders best suits your needs.
FAQ Cash Value
Q: What is cash value in a life insurance policy?
A: Cash value is a component of permanent life insurance policies, such as whole life or universal life insurance. It represents the savings portion of the policy and accumulates over time. It can be accessed during the policyholder’s lifetime and offers potential tax advantages.
Q: How does cash value grow in a life insurance policy?
A: Cash value in a permanent life insurance policy grows over time through a combination of premiums paid, interest credited by the insurance company, and potential dividends (for participating policies). The growth is typically tax-deferred, meaning you won’t owe taxes on the accumulated cash value until you withdraw or surrender the policy.
Q: Can I use the cash value in my life insurance policy while I’m alive?
A: Yes, one of the key benefits of cash value in a life insurance policy is that you can access it while you’re alive. You can withdraw a portion of the cash value or take out a policy loan against it. These withdrawals or loans are typically tax-free up to the amount equal to your premium payments. However, any outstanding loans or withdrawals that exceed the premiums paid may be subject to taxes.
Q: What can I use the cash value in my life insurance policy for?
A: The cash value in your life insurance policy can be used for various financial purposes, including supplementing retirement income, funding college education expenses, providing a financial legacy, or covering long-term care expenses. The flexibility of cash value allows you to use the funds according to your specific needs and goals.
Q: What happens to the death benefit if I access the cash value?
A: When you access the cash value in your life insurance policy through withdrawals or policy loans, it does not directly affect the death benefit. However, the death benefit will be reduced by any outstanding loans and accumulated interest at the time of your passing. It’s important to manage the policy carefully to ensure that the desired level of death benefit is maintained for your beneficiaries.
Q: Can I surrender my life insurance policy to receive the cash value?
A: Yes, if you decide to surrender your life insurance policy, you can receive the accumulated cash value, minus any outstanding loans and any applicable surrender charges. Surrendering the policy means canceling it, which terminates the coverage and forfeits the death benefit. It’s essential to carefully consider the implications before making this decision, as surrendering the policy means losing the protection it provides.
Q: How can I access the cash value in my life insurance policy?
A: You can access the cash value by choosing one of the following options:
- Cash Value Withdrawal: You can withdraw a portion of the cash value directly.
- Policy Loan: You can borrow against the cash value, using it as collateral for the loan. The loan is repaid with interest, and any outstanding loans reduce the death benefit.
- Policy Surrender: You can surrender the policy and receive the accumulated cash value, minus any applicable charges.
Q: Can I use the cash value for long-term care expenses?
A: Yes, if you add a long-term care benefit rider to your whole life insurance policy, you can access a portion of the death benefit to cover long-term care expenses. The amount used for long-term care would reduce the death benefit available to your beneficiaries.