Many people purchase life insurance as a way to ensure that their loved ones will be financially secure in the event of their untimely death. But, if your life insurance policy has a living benefit rider, you may also be able to claim benefits for yourself during your lifetime.
What is a living benefit rider?
Riders are clauses that can be added to an insurance policy to change the policy terms or to add coverage. Riders can be added to a variety of policies, including home, auto and life insurance.
When it comes to life insurance, a standard policy will usually offer a death benefit as the sole policy benefit. However, some life policies provide additional benefits that are accessible during the insured’s lifetime. These are called living benefits, and they may be able to be added to a life insurance policy through a living benefit rider.
Accelerated Death Benefit Rider
One common type of living benefit rider is an accelerated death benefit rider. If you are diagnosed with a terminal illness and your life insurance policy has this rider, you can file a claim to access the accelerated death benefits while you’re alive.
Accelerated death benefits can help cover expenses associated with a serious illness, such as medical bills and lost wages. Depending on the policy terms, you may be able to use the benefits to fund quality family time; for example, you could use them to take a vacation with your family.
Although accelerated death benefits are often only available if the insured is diagnosed with a terminal illness, some riders provide benefits in the case of a non-terminal illness. For example, a critical illness rider or chronic illness rider may offer benefits if the policyholder suffers from cancer or heart disease, even if the condition is not terminal. A long-term care rider could provide a payout if the insured requires assistance with daily living activities, such as eating and bathing.
Since riders and definitions vary between policies and life insurance companies, you should review your terms carefully with your insurance advisor to determine what living benefits are available.
Other Ways to Access Life Insurance Benefits During Your Lifetime
In addition to accelerated death benefits and similar riders, you may be able to access the benefits of life insurance coverage during your lifetime through the following:
- Cash Value: Some types of life insurance policies accrue cash value over time. While term life insurance policies cover a limited period of time and do not build a cash value, permanent life insurance policies may cover the policyholder’s entire lifetime (as long as the policy stays in force) and do develop a cash value. Policyholders may be able to access this cash value during their lifetimes through loans or withdrawals.
- Return of Premium Rider: A return of premium rider on a life insurance policy can allow the policyholder to receive some or all of the premium back once the term ends, assuming that the policy has been kept in force (i.e., active).
- Waiver of Premium Rider: If you cannot work due to a disability, you may have trouble paying life insurance premiums to keep your policy in force. A waiver of premium rider could allow you to suspend your life insurance premium payments while you’re recovering from a qualifying disability.
- Life Settlement: At some point, you may decide you no longer need or can no longer afford your life insurance policy. Instead of surrendering the policy or letting it lapse, you may be able to sell it to a third party through a transaction known as a life settlement. This could be a practical way to access cash when you need it most.
What are the downsides of living benefit riders?
Before purchasing a life insurance policy with living benefits, it’s important to consider the potential downsides.
One drawback is the cost. Although living benefit riders can provide additional benefits, this often means higher premiums. Permanent life insurance policies already tend to be more expensive than term life insurance policies due to their more robust coverage. Adding riders, such as a return of premium rider or accelerated death benefit rider, could significantly increase the cost. If the policy premiums become unaffordable, there’s a risk that the policy will lapse and you’ll lose coverage.
Another disadvantage is that the living benefits may reduce the death benefits. If you claim the living benefits available under your policy, such as an accelerated death benefit or a long-term care benefit, the death benefit amount (which is the amount your named beneficiary receives after your death) may be reduced. If your main goal with life insurance is to provide for your loved ones after you’re gone, a policy with living benefits may not be the ideal choice.
Should you choose a life insurance policy with living benefits?
The idea of a life insurance policy that provides a payout during your lifetime may sound appealing, but it may not be the right fit depending on your needs. Before you settle on a life insurance policy with living benefits, ask yourself the following:
- Can you afford a policy with living benefits? If you’re looking for the most affordable life insurance, you may be interested in a simple term life insurance policy with no riders or supplemental benefits. However, if you can afford to spend more on monthly premiums, you may find that the right benefits are worth the extra cost.
- How would a serious illness impact your finances? Between lost wages and medical costs, a serious illness has the potential to be financially devastating. If you have substantial savings, a disability insurance policy or a critical illness policy, you may not be worried about these expenses. But, if you don’t have another way to cover the financial fallout of an unexpected illness, life insurance with living benefits may be a suitable option.
- What is your primary reason for buying life insurance coverage? If living benefit riders support your goals, they may be worth the cost. However, if you can achieve your goals without these benefits, you may not want to pay more for them.
- Have you consulted with your insurance advisor? Before deciding which life insurance policy is right for you, make sure to speak with your insurance advisor to discuss your options. They’ll be able to provide insight into policy types, rider options and ways to make your life insurance policy work for you.
If you have loved ones who depend on you for financial support, a life insurance policy can be an important way to provide them with long-term financial security. However, many people are surprised by the number of options available, including living benefit options. Higginbotham’s experienced life insurance agents can help you understand your options and find a policy that meets your needs. Get in touch with a member of our life insurance team to learn more.
