Living Benefits Explained: Get More from Your Life Insurance Policy

A serious illness, a disabling injury, or an unexpected medical diagnosis can quickly turn your financial world upside down. Living benefits in life insurance policies allow you to access a portion of your policy to cover expenses, replace income, or simply keep your life on track while you recover.

If you’ve always thought of life insurance as something that only helps others after you’re gone, it’s time to rethink its role. With living benefits, the support begins when you need it most—not someday, but today. 

What Are Living Benefits in Life Insurance?

Living benefits allow policyholders to access portions of their life insurance death benefit while alive, typically under specific conditions like illness or disability. This matters because it transforms a traditional policy into a versatile financial safety net, helping cover unexpected costs without depleting savings. For many Americans, this added layer means peace of mind during health crises.

Living benefits come in two main forms: cash value accumulation in permanent policies and accelerated death benefit riders available on both term and permanent plans. Cash value grows over time from premium payments, acting like a savings account you can borrow from or withdraw. Riders, on the other hand, let you accelerate payouts for qualifying events.

Key concepts:

• Death benefit: The payout your beneficiaries receive upon your passing, which living benefits can reduce if accessed early.
• Riders: Optional add-ons to your policy that enable living benefits, often at an extra cost.
• Permanent vs. term policies: Permanent options like whole life build cash value, while term policies usually rely on riders for living benefits.

Types of Living Benefits You Can Use

Knowing the different types of living benefits helps you choose features that align with your health risks and financial goals. This is crucial for tailoring your policy to real-life scenarios, such as a sudden diagnosis, ensuring you’re not caught off guard. Let’s break them down by common categories.

Accelerated Death Benefit Riders

These riders allow you to receive a portion of your death benefit early if diagnosed with a qualifying condition.

• Terminal illness rider: Pays out if a doctor estimates you have 12-24 months to live, usable for medical bills or personal needs.
• Chronic illness rider: Activates if you can’t perform two of six daily activities (like eating or bathing), helping with long-term care costs.
• Critical illness rider: Covers specific events like heart attacks, strokes, or cancer, with payouts based on severity.

Cash Value in Permanent Policies

Permanent life insurance builds a cash component over time, which you can access without reducing the death benefit if managed carefully.

• Withdrawals or loans: Borrow against the value for any purpose, with interest on loans.
• Premium payments: Use accumulated value to cover future premiums if cash flow tightens.

Other Common Riders

• Long-term care rider: Funds nursing home or in-home care, addressing rising U.S. healthcare costs.
• Disability waiver of premium: Stops premium requirements if you’re disabled, keeping coverage intact.

How Living Benefits Work

Activating a living benefit rider requires meeting specific medical criteria and following your insurance company’s claim process. The first step typically involves getting certified by a licensed healthcare practitioner that you meet the rider’s qualifying conditions, whether that’s a terminal diagnosis, chronic illness, or critical condition.

The documentation requirements vary by rider type but generally include medical records, physician statements, and sometimes independent medical examinations. For terminal illness benefits, you’ll need certification that your life expectancy is 24 months or less. Chronic illness riders require documentation that you cannot perform specified daily living activities or have cognitive impairment.

Once your claim is approved, you’ll receive your benefit payment, minus any administrative fees. The amount you receive directly reduces your policy’s death benefit, and you’ll continue paying premiums to keep the remaining coverage in force. Some policies allow multiple claims over time, while others provide only one-time payouts depending on the rider type.

Advantages of Adding Living Benefits

Adding living benefits to your policy can provide financial flexibility during life’s uncertainties, potentially saving you from debt or asset sales. This is especially valuable in the U.S., where medical expenses are a leading cause of bankruptcy, making these features a smart way to enhance protection.

Benefits include:

• Financial support during illness: Access funds for treatments, replacing lost income, or covering daily expenses without tapping emergency savings.
• Tax advantages: Payouts from accelerated benefits are often tax-free if used for qualified long-term care, per IRS rules.
• Flexibility for retirement: Cash value can supplement income, helping bridge gaps in Social Security or 401(k) plans.
• Peace of mind for families: Reduces the need for loved ones to provide financial aid during your health challenges.

Potential Drawbacks to Consider

While living benefits offer valuable support, they come with trade-offs that could affect your long-term coverage. Weighing these helps you make informed decisions, avoiding surprises like reduced payouts for heirs. It’s about balancing immediate needs with future security.

Drawbacks include:

• Reduced death benefit: Any amount accessed early subtracts from what beneficiaries receive.
• Higher premiums: Adding riders increases costs, which might strain budgets for those on fixed incomes.
• Tax implications: Loans against cash value can be taxable if the policy lapses, and not all benefits qualify for tax-free status.
• Eligibility restrictions: Payouts depend on strict medical criteria, and not all policies offer every type.

Who Should Consider a Policy with Living Benefits?

Living benefits make the most sense for people with family histories of chronic or critical illnesses, particularly conditions like cancer, heart disease, or stroke that tend to run in families. If your parents or siblings have faced these health challenges, adding living benefit riders provides valuable protection against similar risks.

People concerned about long-term care costs should strongly consider these benefits, especially given that about 70% of people turning 65 today will need some form of long-term care during their lifetime.

These benefits are also valuable for individuals who want flexible financial planning tools beyond traditional life insurance. If you’re looking for ways to protect against multiple financial risks with a single product, living benefits can serve as backup protection for disability, critical illness, and long-term care needs.

However, if you have substantial savings, comprehensive health insurance, and existing disability coverage, the additional cost of living benefit riders may not provide enough value to justify the expense.

How to Add Living Benefits to Your Life Insurance

If you’re shopping for new coverage, ask potential insurers about their living benefit options during the quote process. Many companies automatically include terminal illness benefits, but chronic illness, critical illness, and long-term care riders typically require specific requests and additional underwriting.

For existing policyholders, contact your insurance company or agent to inquire about adding riders to your current policy. Keep in mind that adding riders to existing policies often requires new medical underwriting, especially if significant time has passed since your original application.

When comparing options, pay attention to the specific conditions covered, benefit amounts available, waiting periods, and ongoing costs. Some insurers offer more generous terms or broader coverage for the same premium cost.

FAQs

Can I get living benefits on term life insurance? 

Yes, most term life insurance policies can include living benefit riders, though you’ll typically pay extra for optional riders like chronic illness or critical illness coverage. Terminal illness benefits are often included automatically.

How much does it cost to add living benefit riders? 

Costs vary significantly by rider type and insurer. Terminal illness riders are usually free, while other riders can increase premiums by 10-25% or more. Get quotes with and without riders to compare the actual cost difference.

Will using living benefits reduce the death benefit? 

Yes, any amount you receive from living benefits reduces your death benefit dollar-for-dollar. If you take $100,000 from a $300,000 policy, your beneficiaries will receive $200,000 when you die.

Are living benefits taxable? 

Living benefits are generally tax-free under IRC Section 101(g) for terminally ill individuals and chronically ill individuals when used for qualified long-term care expenses. Critical illness benefits may have different tax treatment, so consult a tax professional for your specific situation.

Make the Most of Your Life Insurance

Living benefits transform life insurance from a single-purpose product into a comprehensive financial protection tool. By understanding your options and choosing the right combination of benefits, you can create coverage that protects both your family’s future and your present financial security.

The key is matching your living benefit choices to your specific risks and financial situation. If you have a family history of heart disease, prioritize critical illness coverage. If you’re concerned about long-term care costs, focus on chronic illness or long-term care riders.

The right policy can provide peace of mind knowing that you’ll have financial resources available if serious illness strikes, allowing you to focus on treatment and recovery rather than financial stress.

Take time to review your current coverage and consider whether adding living benefits aligns with your overall financial protection strategy. Your life insurance should work as hard for you while you’re living as it does for your beneficiaries after you’re gone.