Living Benefits: Accessing Your Life Insurance While Living

Most people think of life insurance as something that only kicks in after they’re gone—a way to take care of their family, not themselves. The truth is that not all policies work the same way.

Living benefits, also called accelerated death benefits, are one example. They let you access part of your own death benefit while still alive if you’re facing a qualifying illness, turning a policy that once felt entirely future-focused into something that may help you today.

How Living Benefits Actually Work

A living benefits rider, often called an accelerated death benefit rider, is commonly an option on both permanent and term life insurance policies. Depending on the insurer, it may be included automatically at no additional upfront cost or offered as an optional rider for an additional premium. However, accessing this benefit is subject to the policy’s specific terms and requires insurer approval.

The policyholder can generally use this benefit when diagnosed with a qualifying health condition, such as a terminal illness, chronic or critical illness depending on the policy.  In these cases, they can accelerate a portion of their death benefit, the amount of money a life insurance policy will pay out to the named beneficiary and receive it themselves while still living.

Depending on the policy and insurer, the amount available typically ranges from 25% to 100% of the death benefit and doing so reduces the amount left for beneficiaries.

This means if a $500,000 policyholder accesses $150,000 through a living benefits claim, the remaining death benefit paid to beneficiaries after the policyholder’s passing is reduced accordingly, sometimes with a small interest or processing charge factored in as well.

Tax Considerations

Under IRS guidelines, benefits accelerated due to a terminal illness diagnosis, generally defined as a life expectancy of 24 months or less, are typically not subject to federal income tax, though tax treatment can vary by circumstance and is worth confirming with a tax professional before a claim is filed.

Terminal, Chronic, and Critical Illness: Not the Same Rider

Living benefits riders are not one uniform product.

• Terminal illness riders, the most common version, generally require certification from a physician that the insured has a limited life expectancy.
• Chronic illness riders apply to conditions that impair a person’s ability to perform basic daily activities, such as bathing or eating, and often require ongoing recertification to continue accessing funds.
• Critical illness riders are typically triggered by a specific diagnosis, such as cancer, a heart attack, or a stroke, regardless of life expectancy.

A policy may include one, two, or all three types, and the qualifying conditions, elimination periods, and payout percentages vary meaningfully from insurer to insurer, which makes reading the actual rider language important rather than assuming all living benefits work identically.

Combining Life Insurance with Long-Term Care

Industry research from LIMRA points to rising interest in life insurance products that combine long-term care benefits or other living benefits. One major focus for consumers in deciding was cost. More than 1 in 4 consumers said that a standalone long-term care insurance policy is too costly and 36% would consider a life combination product because they’re concerned that LTC expenses could deplete their savings.

Checking What You Already Have

Many policies might have living benefits as part of their standard policy design rather than treating them as a premium add-on, which means many policyholders may already have access to this feature without realizing it.

That said, access isn’t guaranteed across the board. Older life insurance policies might not have a living benefit rider at all.

“An older life insurance plan might have worked for you at the time of purchase but may not account for changes in life situation and needs,” says John Lamont, Senior Vice President, Investments at David Lerner Associates. “Reviewing your policies regularly can help evaluate your current benefits and see if your strategies need modifications.”

Strategy Planning Before Crisis Events

The best time to understand a living benefits rider is before a health crisis, not during one.

Policyholders should confirm

• which illnesses qualify
• what percentage of the death benefit can be accessed
• whether there is a waiting or elimination period
• how a claim reduces what beneficiaries eventually receive

For anyone shopping for a new policy, asking whether living benefits are included at no charge, or available as an affordable add-on, is a reasonable question to raise directly with a financial professional such as an Investment Counselor during the application process.

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Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. The subject of this article is fictitious and created for illustrative purposes only. It is based on events of a similar nature and should not be interpreted as a direct depiction of any specific individual, organization, or incident. Any resemblance to actual persons, living or deceased, or actual events is purely coincidental.  David Lerner Associates does not provide tax or legal advice.