Are Life Insurance Living Benefits Worth the Added Cost?
Although Most people consider the purchase of life insurance to be for the purpose of protecting their survivors, today’s policies can provide insureds with benefits that can help them out financially while they’re still living.
These “living benefits” – also known as accelerated death benefits – can provide policy holders with another avenue for paying down medical bills, reducing debt, or even taking a vacation, without dipping into savings or other assets. And, in some cases, they may be the only viable option that’s open to them.
What Types of Benefits Can You Get?
There are different types of living benefits available – and each of these will usually require different factors, or “triggering events,” from the insured in order to qualify.
Some of the more common types of living benefits include:
- Terminal Illness – The terminal illness benefit pays out a certain percentage of the death benefit if the insured is diagnosed with a terminal illness that results in them having a life expectancy of one year or less. (In some instances, the requirement may be two years or less). The money that is received by the insured can be used for any purpose.
- Chronic Illness – With the chronic illness benefit, a monthly amount is paid out to the insured should he or she be unable to perform at least two activities of daily living. (These activities of daily living, or ADLs, include eating, dressing, bathing, toileting, continence, and / or transferring). With this benefit, the policy must typically have been in force for a certain minimum length of time before the funds will be paid out to the insured.
Factors to Consider
When accessing the living benefits from a life insurance policy, there are certain factors to consider. For example, the cash that is received will be applied against the amount of the death benefit that is eventually paid out to the policy’s beneficiary.
Therefore, if those funds have been earmarked for other purposes such as paying estate taxes or extinguishing other debts, it is important to ensure that other arrangements either have been or will be made.
Also, the money that is received via an insurance policy as living benefits is generally not subject to federal income taxation – as long as the distribution meets certain criteria. One of these factors is that the insured is considered to be terminally ill when he or she files their annual income tax return.
It is also important to keep in mind that, even though the amount of the death benefit will be reduced due to the payout of the living benefits, the policy’s premiums will still be due. This will be for the purpose of keeping the remainder of the policy in force.
If you’ve considered using life insurance policy benefits for purposes other than just life insurance, give us a call. We can help you in putting together a more complete plan with your premium dollars.