Get creative with life insurance living benefits

Something that often surprises me is how many people are not aware of living benefits as a component of life insurance.

This article dives head-first into what living benefits can do for you when you are in a difficult personal situation (typically health or financial problems) and how they can make a bad situation better, at least financially.

Let’s get started.

What are life insurance living benefits?

A traditional life insurance policy provides a death benefit payout and, if it is a permanent form of life insurance, a cash value component. This is an awesome gift that life insurance gives to a deceased person’s loved ones.

But what happens if the unexpected happens? What if you get sick–really sick–and can’t afford treatment?

How about an example? You have a traditional $250,000 whole life insurance policy on yourself. Out of nowhere comes the news you have a terminal illness. Your $250,000 policy will do what it is supposed to do–take care of your loved ones when you die–but it can't help you deal with all the responsibilities of a terminal illness before you die.

Enter living benefits. With this additional coverage with your life policy, you can access a portion of the face amount of your life insurance to deal with your health crisis. Most life insurance policies do not contain a living benefits feature. They are typically an add-on to the policy called a rider. And they come with a price. Also, living benefits can be added to both term and permanent (e.g. whole life insurance, universal life insurance, etc.) life insurance policies.

In what situations can I use a living benefit?

There are several situations that a living benefits rider may cover. Here are three of the most common:

• Terminal Illness. This covers situations where the policyholder has been told they have limited time to live. Check each policy option closely because there will likely be a timeframe, such as six to 12 months.
• Critical Illness. Living benefits would cover some medical expenses for life-threatening illnesses such as cancer, heart attack, stroke, and others.
• Chronic Illness. Living benefits can be activated when the policy owner cannot perform basic daily living activities such as dressing, bathing, eating, and others.

There are other situations beyond these three that might also be covered (check the policy closely): long-term care, disability, medical expenses, nursing home, debts, and in some cases experimental treatments.

An important note: Use of living benefits will reduce the ultimate death benefit to your beneficiaries.

As I mentioned, each insurance company is a little different. I strongly urge you to talk with a licensed insurance agent or financial advisor.

What should I consider in the decision to buy a living benefits rider?

There are five significant factors to consider. The hard part of this decision is the interrelated and personal nature of these factors. It is seldom one factor that drives the decision. Let’s look at each:

1. Health. If you have existing health conditions, living benefits may be a good backstop behind your health insurance.
2. Age. Whether you have existing conditions or not, age is an important factor with living benefits.
3. Family. Family health history specifically could impact your decision to purchase living benefits, even if today you are in good health.
4. Elder Care. This is a big one. Many people have inadequate coverage for what is a very expensive issue.
5. Personal. What will make you feel better? Insurance is a peace of mind product, and it’s not uncommon that people tell me it’s the most important factor to them. It’s very personal.

There are some issues that might give you pause in the purchase process.

First, whatever amount the insurance company allows you to withdraw from the policy for living benefits will be deducted from the payout after your death. A financial advisor would be a good source to lean on in this decision. It is a trade-off for sure.

Second, Not everyone with an issue, health or otherwise, will be approved to withdraw funds. That’s why it is very important for your licensed insurance agent to educate you on those criteria so you are fully informed.

Third, there is a cost-to-living benefit. Your premium will increase based on your personal situation at the time. It will be a classic price-value question only you can answer.

To wrap this all up, I believe living benefits are a great addition to a life insurance policy if you have health issues personally or in your family history. Seek the help of an agent or a financial professional.