Living Benefits in Life Insurance: What Is It and Is It for You?

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Updated: October 3, 2024

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A standard life insurance policy provides a death benefit to your beneficiary when you die. But living benefits on a life insurance policy are benefits you can use while still alive.

If you buy term life insurance, you usually have the option to customize your policy with several living benefit options. A permanent life insurance policy, such as whole and universal, can include the same living benefits with the added benefit of cash value access. Evaluating the pros and cons of living benefits life insurance is vital, ensuring you get the right coverage for your needs.

Depending on your situation, you may not need living benefits on a life insurance policy. A standard term life insurance policy without living benefits is often the most cost-effective option and may be the best for individuals in certain situations.

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Key Takeaways

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Living benefits on a life insurance policy refers to benefits you can use while still alive. A qualifying medical event allows you to accelerate part of the death benefit.

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Long-term care, a disability premium waiver, chronic or terminal illness and critical illness are examples of living benefits riders on a life insurance policy.

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Buying permanent (whole) life insurance also provides access to cash value you can withdraw or take a loan from. You can also include long-term care coverage for an extra cost.

What Are Living Benefits in Life Insurance?

Some people use living benefit options on their life insurance policy as an extra source of income in specific situations. The most common life insurance living benefits are accelerated death benefits. These benefits are available on both term and permanent life insurance policies.

Living benefits of life insurance grant access to part of the death benefit if the insured experiences a qualifying health condition. Once approved, the life insurance company accelerates or makes available a portion of the death benefit. Claiming living benefits on a life insurance policy reduces the amount the beneficiary receives upon the insured’s death.

Common Examples of Living Benefits
Benefit
Description

Chronic Illness

A chronic illness rider applies when a doctor diagnoses the insured with a chronic illness that impairs at least two activities of daily living (ADLs), which include eating, bathing, continence, dressing and toileting. A chronic illness lasts at least a year or longer and requires ongoing medical attention or limits ADLs.

Critical Illness

A critical illness rider applies after a policyholder is diagnosed with an illness that shortens life expectancy but may not be terminal and can come with high medical expenses. Examples of critical illnesses include heart attack, stroke or kidney failure.

Disability Waiver

If you suffer from a long-term disability that prevents you from working for at least six consecutive months, the disability waiver of premium will allow you to skip premium payments to keep coverage in force until you are able to go back to work.

Long-Term Care

The long-term care benefit rider will accelerate part of the death benefit to pay for long-term care expenses not covered by health insurance. Like the chronic illness rider, you must be unable to perform at least two of the six ADLs.

Terminal Illness

If you are diagnosed with a terminal illness with two years or less to live, you can accelerate part of the death benefit to pay for medical costs, final expenses or other personal expenses, like a vacation. This feature may be added to your life insurance automatically but can also be an optional feature with additional premium.

If you’re trying to decide if life insurance with living benefits is worth it, consider this:

  • According to the CDC, 6 in 10 adults live with a chronic illness. Four in 10 live with two or more.
  • Three in 10 Americans can’t afford a $400 bill without using a credit card.
  • A person turning 65 today has a close to 70% chance of requiring long-term care services. Twenty percent will need them for five years or more.
  • Cancer is just one form of terminal illness. The American Cancer Society estimates 1 in 5 men have a risk of terminal cancer, while 1 in 6 women have the same risk.
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MONEYGEEK DICTIONARY

A rider is a life insurance benefit you can add to your policy to provide another layer of protection. It allows you to customize your policy to your unique needs. Besides the riders listed above, you could include riders for accidental death, guaranteed insurability, spouse or child term coverage and return of premium.

How Do Living Benefits Work?

Unlike a death benefit, which only works once you pass away, living benefits work as life insurance you can use while alive. When you choose a living benefit option in a life insurance policy, you’re giving yourself access to funds that wouldn’t be available otherwise. When you buy a standard term life policy, you get a cheaper rate because the only benefit is the death benefit your beneficiary receives after you die.

Life insurance living benefits enable policyholders to draw upon their insurance benefits early under certain conditions, thus providing financial relief during critical times. This feature makes life insurance with living benefits a versatile financial tool, not just a posthumous benefit.

Life Insurance Cash Value: Another Kind of Living Benefit

When you buy permanent life insurance, you get another type of living benefit: cash value. Available in whole life and universal life insurance policies, cash value is like a savings account built into your life insurance that you can withdraw or take a loan from.

Part of each premium payment goes toward the cash value, which will grow over time with interest. The growth rate depends on the type of life insurance policy you have and how much in premiums you pay. If you decide you no longer need permanent life insurance, you can surrender the policy and keep the cash surrender value.

There are multiple ways to use the cash value living benefit while still alive.

  1. 1
    Withdrawals

    You can withdraw a portion of your cash value balance tax-free as long as the withdrawn amount is equal to or less than your paid premiums. You could owe taxes if the withdrawn amount is from dividends, capital gains or interest. The withdrawn amount reduces your death benefit unless repaid.

  2. 2
    Dividends

    Mutual insurance companies can choose to pay permanent life insurance policyholders a dividend if there is money left over at the end of the year after paying expenses. This dividend can be added to the cash value to allow it to grow faster but can be taxable as ordinary income if removed from the cash value account.

  3. 3
    Loans

    Taking a loan from the cash value doesn’t require an application or credit check and can have a better interest rate than taking out a personal loan. Paying the loan back is optional, but interest — as determined in your policy contract — will continue to accrue and reduce the death benefit amount.

  4. 4
    Surrendering

    A policy surrender allows you to access the cash value in a lump sum minus any unpaid premiums or outstanding loan balance. Surrendering your policy cancels it, so there will be no death benefit amount available to your beneficiary when you pass away.

Types of Life Insurance Policies Offering Living Benefits

Living benefits can be added to various types of life insurance policies, enhancing their utility by providing financial support during the policyholder's life under certain conditions. The most common policies that offer living benefits include term, whole and universal life insurance. Each policy type caters to different financial needs and goals, making it vital to understand their specific features and benefits when choosing the right coverage for your circumstances.

Term Life Insurance

Term life insurance is designed for temporary coverage with a set duration, such as 10, 20 or 30 years. Getting term life insurance with living benefits allows you to access part of the death benefit if you face a qualifying illness or condition during the term.

Living benefits in term life insurance are commonly available as optional riders. However, some insurance companies might include certain living benefits as standard features for term policies.

Whole Life Insurance

Whole life insurance offers lifelong coverage and the guarantee of accumulating cash value. Living benefits of whole life insurance often relate to the cash value.

While many living benefits are available through optional riders, some insurers include basic forms of these benefits, like accelerated death benefits for terminal illness, as part of the standard policy package. This makes whole life insurance with living benefits a comprehensive financial planning tool.

Universal Life Insurance

Universal life insurance combines the permanent coverage of whole life with the flexibility of adjustable premiums and death benefits. Similar to whole life, living benefits in universal life insurance often refer to the cash value component.

Other living benefits in universal life insurance are typically offered through optional riders that provide access to funds in cases of chronic or terminal illness. Depending on the insurance provider, some basic living benefits may be included as standard parts of the policy. Having universal life insurance with living benefits allows policyholders to adjust their coverage as their financial situation changes while also having the ability to access funds in cases of chronic or terminal illness.

Limitations of Living Benefits in Life Insurance

Living benefits in life insurance offer valuable support during critical times, but they come with certain limitations. Understanding these restrictions is important for making informed decisions.

  • Eligibility Criteria: Not all policyholders may qualify for living benefits in life insurance. Eligibility often depends on specific medical diagnoses or conditions, and the criteria can vary between insurance providers.

  • Reduction in Death Benefit: Accessing life insurance living benefits may reduce the overall death benefit available to beneficiaries, potentially impacting the financial support provided after the policyholder's death.

  • Claim Limits: Insurance companies may impose limits on the amount that can be withdrawn through the living benefits of a life insurance policy, either as a percentage of the death benefit or a set dollar amount.

  • Additional Costs: Some living benefits riders may require an additional premium. That means life insurance with living benefits costs more than a standard policy.

  • Waiting Period: There may be a waiting period from the time the coverage is signed until the date when the living benefits become effective, restricting immediate access.

Cost of Life Insurance with Living Benefits

The pricing of life insurance with living benefits can vary significantly based on the type of policy, the extent of coverage and the specific living benefits chosen.

Generally, adding living benefits to a life insurance policy, especially through optional riders, can increase the premium costs. These benefits offer the potential to access the policy’s value before death, which presents a higher risk to the insurer.

It's important to compare offers from various life insurance companies with living benefits to find the best balance between cost and coverage, ensuring the policy fits within your financial plan while providing the necessary security.

Should You Purchase Life Insurance With Living Benefits?

Although most living benefits life insurance riders come with additional premiums, some are free with your policy. The most common free living benefit is the accelerated death benefit for terminal illness. Ask your agent if you’re not sure whether you have living benefits on your life insurance policy. If you’re looking to purchase life insurance with living benefits, let your agent know so they can tailor your quote and policy to your specific needs.

There are several reasons to purchase living benefits life insurance. If there’s a family history of chronic or terminal illness, you think you could outlive your retirement income or you plan to start a business, this might be the best policy for you.

Here are some compelling reasons to consider a life insurance policy with living benefits:

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    Your family has a history of chronic or terminal illness.

    Medical bills can be costly with a chronic or terminal illness. If either type of illness runs in your family, you’re more likely to end up with a chronic or terminal illness. Life insurance with living benefits can help you pay for medical costs or enjoy one last vacation with your loved ones if you’ve been diagnosed with a terminal illness.

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    You think you need more money for retirement.

    While no one can predict how long they’ll live, some people end up living longer than their retirement income. Buying life insurance with living benefits, especially cash value life insurance, can help ensure you’ll have enough money to fund your retirement. You can withdraw funds or take a tax-free loan from your cash value and still have accelerated death benefit riders to access part of the death benefit if you need long-term care or are diagnosed with a qualifying illness.

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    You plan on starting a business.

    Starting a business can be scary, but for many, the fear is worth it when they succeed. Having living benefits life insurance can provide you with cash value to fund your business venture or provide collateral if you need a business loan. Life insurance proceeds can provide your heirs with the funds to continue the business or transition according to your wishes. You can also purchase life insurance for your key employees as part of a compensation package.

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    It’s free.

    Some life insurance policies include living benefit riders automatically at no extra cost. The terminal illness rider is usually free, while others may cost extra. Working with a life insurance agent can help you find the best policy with free living benefits coverage and the right policy for your needs. Consider a permanent life insurance policy if you want cash value benefits or long-term care coverage. Other living benefits riders can be added to a term life insurance policy.

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MONEYGEEK EXPERT TIP

If you're considering life insurance with living benefits and cash value, think of your policy as more than just a safety net for your beneficiaries. Use the cash value component as a strategic financial tool. Regularly review and manage this aspect of your policy to potentially enhance your investment returns or provide liquidity during financial tight spots without disrupting your long-term goals. This proactive approach can turn a simple insurance product into a dynamic part of your overall financial strategy.

How to Get Living Benefits in Life Insurance

Obtaining living benefits in life insurance involves a few key steps. Here's a step-by-step guide to help you get started.

  1. 1
    Research Insurance Companies

    Start by researching insurance providers that offer living benefits, either as standard features or optional riders. Make a list of potential companies.

  2. 2
    Identify Policy Types

    Look for policies that mention living benefits or accelerated death benefits. Consider both term and permanent life insurance options to see which suits your needs.

  3. 3
    Consult a Professional

    Consider engaging with a licensed insurance agent or financial advisor. They can help you find policies tailored to your needs and budget, making the selection process easier.

  4. 4
    Complete the Application

    Fill out the application form for the chosen policy. This step often includes undergoing a medical exam and providing details about any pre-existing conditions you may have.

  5. 5
    Review and Add Riders

    Once approved, review your policy. If living benefits are not included, add the appropriate riders. Be aware that this may increase your premium.

  6. 6
    Understand the Costs

    Familiarize yourself with any additional costs associated with adding living benefits riders. This will help you manage your budget effectively.

  7. 7
    Review Eligibility and Limitations

    Understand the criteria for accessing living benefits and any limitations that may apply. This includes knowing how it may affect your death benefit.

  8. 8
    Read Policy Documents

    Thoroughly read all policy documents to understand the features of the living benefits offered. Make sure they align with your financial and health goals.

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MONEYGEEK EXPERT TIP

When searching for the best life insurance with living benefits, it’s essential to compare the costs and the scope of what’s covered under these benefits. Opt for a policy that offers comprehensive living benefits, tailored to a wide range of health scenarios. This ensures that your policy provides tangible financial support when you need it most. Seek out providers recognized for offering the best living benefits life insurance to maximize the value of your investment.

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How to Claim Living Benefits of Life Insurance

Claiming living benefits from your life insurance policy requires understanding the specific conditions under which these benefits become accessible. Here’s how you can proceed:

  1. 1
    Review Your Policy

    Begin by thoroughly reviewing your policy documents to understand the types of life insurance living benefits included and under what circumstances they can be accessed. This might include facing a chronic, critical or terminal illness.

  2. 2
    Consult Your Insurance Provider

    Contact your insurance company or speak with your agent about the process for filing a claim. They can provide the necessary forms and guide you through the steps required.

  3. 3
    Gather Required Documentation

    Collect all necessary medical documentation that supports your claim. This may include medical records, a doctor’s diagnosis and proof of meeting specific criteria outlined in your policy.

  4. 4
    Submit Your Claim

    Fill out the claim form accurately and attach all required documentation. Ensure everything is completed as per the insurer's instructions to avoid delays.

  5. 5
    Follow-Up

    After submitting your claim, contact your insurance provider to monitor its progress. They may request additional information or documentation as they process it.

  6. 6
    Receive Benefits

    Once your claim is approved, the insurer will provide the living benefits as specified in your policy, which could be a lump sum payment or regular installments, depending on your policy terms.

Understanding how to effectively navigate the claims process for living benefits of life insurance ensures you can utilize your life insurance policy to its full potential when needed most.

FAQ About Living Benefits in Life Insurance

In some situations, buying life insurance with living benefits is worth it. However, every person's needs and circumstances are different. Reviewing the answers to some of the most commonly asked questions about living benefits can help you determine whether are worthwhile.

What is life insurance with living benefits?
What are living benefits?
Should I purchase life insurance with living benefits?
Is life insurance with living benefits worth it?
What type of life insurance provides living benefits?
Does term life insurance have living benefits?
Can I repay the amount withdrawn from living benefits?
Do living benefits expire if not used?

Read More About Life Insurance

About Mandy Sleight

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Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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