When you think of Long Term Care insurance what comes to mind? If you’re thinking dollar signs, then you’re not alone. Although Long Term Care insurance provides excellent benefits, it’s generally not affordable for most people. If the cost of Long Term Care coverage is too expensive, what other options do you have? What if
Life Insurance with Living Benefits
When planning your financial future, you may choose to obtain a life insurance policy. Policies come with a wide range of optional features and add-ons called riders, such as the living benefits rider.
While most types of life insurance include a death benefit, the payout only comes after your death. With living benefits, you can access a portion of the death benefit while you are still alive. Here is a closer look at how life insurance with living benefits work.
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What Are Living Benefits?
Living benefits are a type of insurance rider. A rider is simply a provision to your policy that adds specific benefits.
With a living benefits rider, you may receive a portion of your available death benefit to cover medical costs or even replace lost income from a qualifying illness. Some insurance companies also refer to these riders as accelerated death benefits riders.
Basically, you get to access your life insurance benefits prior to death.
The primary purpose of the living benefits rider is to give policyholders a source of supplemental income in the event of a major illness. When you suffer from a stroke, heart attack, cancer, or any other illness that limits your ability to earn an income, you may find it difficult to cover the costs of your medical care.
The details of the living benefits rider will vary depending on the insurance company and the type of insurance policy. Some companies place a limit on the amount that you can accelerate.
Upon your death, the insurance company pays out any remaining death benefit to your beneficiaries.
What Type of Life Insurance Offers Living Benefits?
Due to the competitive nature of the insurance industry, most insurance policies now include some form of a living benefit with their coverage. In some cases, the insurance company includes the rider as part of the policy at no extra cost.
Insurance companies are most likely to offer living benefits with their term life insurance policies. Term life insurance tends to include fewer fees and a simplified structure. You pay your premiums, and your beneficiaries receive the death benefit upon your death.
There are several types of whole life insurance and universal life insurance policies that offer living benefit riders along with the ability to accumulate cash value growth. On the downside, these policies will be much more expensive than a term insurance policy since they provide permanent life insurance protection.
What Are Qualifying Events for Receiving Living Benefits?
You cannot receive living benefits of life insurance for just any health issue. If you break a bone or catch the flu, you will not receive a payout.
Insurance companies provide their own list of qualifying events and conditions that allow you to accelerate the benefits. In most cases, to qualify for a payout, you need to suffer from an unexpected illness. The types of illnesses that qualify depends on the insurance company. However, these health problems tend to fall into one of three categories:
- Chronic illnesses
- Critical illnesses
- Terminal illnesses
Policies may include these three categories in one rider or in separate riders. Terminal illness riders have existed for quite some time and are nearly included on every life insurance coverage. The inclusion of chronic illness riders and critical illness riders is more recent and mostly due to the competition between insurance companies.
Each category has its own requirements and qualifying events. Before finding a life insurance policy that includes these options, you should understand how they work.
Chronic Illness Rider
With a chronic illness rider, you receive accelerated benefits when your illness keeps you from performing two of six Activities of Daily Living (ADL).
ADL refers to your daily self-care activities. Health professionals use basic ADLs as a measurement of your functional status. These activities include:
- Bathing and showering
When you cannot perform at least two of these activities, you may require a caretaker. Even if the caretaker is a family member, he or she typically receives some form of payment for their services. To cover these costs, you may be eligible to accelerate your death benefit.
Critical Illness Rider
The critical illness rider provides living benefits for qualifying illnesses. The list of illnesses varies. Some insurance companies have a long list of applicable diseases, while others have stricter criteria.
The most common qualifying illnesses include:
- Heart attack
- End-stage renal failure
- Major organ transplant
- Amyotrophic Lateral Sclerosis (ALS) / Lou Gehrig’s disease
To compete for new policyholders, insurance companies may include additional qualifying illnesses. For example, you may find a chronic illness rider that provides for Alzheimer’s disease, diabetes, multiple sclerosis, or HIV/AIDS.
There are also a few companies that will allow you to accelerate your death benefit if you are required to live in a nursing home. This is not to be mistaken as long-term care insurance, but the early advancement of the death benefit can help pay for long-term care costs.
As the variety of qualifying illnesses vary, it helps to review the applicable illnesses before signing the policy.
Terminal Illness Rider
Insurance companies began offering terminal illness riders before the introduction of chronic illness riders and critical illness riders. It is more commonly available with various insurance policies.
Policyholders that receive a terminal diagnosis may qualify to receive accelerated death benefits. Typically, if you have 6 to 12 months to live, you may choose to accept the living benefits. However, the time frame also varies. Some insurance policies may allow terminal diagnoses up to 24 months.
How Are Benefits Paid Out?
Benefits are always paid out to the insured or the owner of the life insurance policy. If you become ill with a qualifying illness, before you can receive a living benefits payout, you will need to submit a claim with the insurance provider. The company will often require copies of medical records from your hospital or doctor to help verify the severity of your health condition.
Your insurance policy may also include a waiting period before a living benefits claim will be paid out. In most cases, you will need to wait 30-90 days to receive accelerated benefits.
Upon approval, the payout often comes at the start of the following month.
The method for receiving the payout often depends on the details of the rider and the qualifying event. Many insurance companies pay a lump sum amount for terminal illness, chronic illness, and critical illness. However, other companies may only offer the lump sum for terminal conditions and critical illnesses.
Instead of a lump-sum payment, you may receive monthly or annual payouts for chronic illnesses that prevent you from fully caring for yourself. Keep in mind that these riders do not provide a suitable option for long-term care.
To receive coverage for ongoing medical expenses, you need long-term care (LTC) rider. With an LTC rider, you receive accelerated benefits to cover daily care expenses when you are unable to provide it for yourself.
The accelerated death benefits are not taxable at the Federal level. While you may not pay Federal taxes on the payout, you may need to pay taxes at the state level. Speak with a representative from the insurance company to learn more about the tax liabilities in your state.
How Much Money Can You Receive?
The amount you can receive depends on the policy and the rider.
Living benefit riders that come free with the life insurance coverage can offer up as much as 100% of the death benefit for a qualifying chronic, critical or terminal illness. But, this all depends on several factors, starting with the claim paperwork. From there, the life insurance company will review the severity of the illness by reviewing medical records, assess the life expectancy of the insured and even the amount of time left on the life insurance contract.
When all of these factors are taken into consideration, the life insurance company will determine a maximum payout that they will allow to be accelerated from the death benefit. The policy owner has the option to accept the payout, request a lower amount or decide to not accept the payout at all leaving the full death benefit in place.
Some life insurance companies will cap the maximum amount of death benefit that can be accelerated to an amount at 50 to 90%. This allows for there to be some remaining death benefit to your beneficiary should you unexpectedly pass away.
Some insurance policies may include a living benefits rider that has a defined payout in which you know how much you will receive if you come down with a qualifying illness. Living benefit riders that offer defined benefits generally cost extra.
Do Living Benefits Cost Extra?
Well, yes and no.
As previously mentioned, some insurance companies include living benefits in their policies while others charge an extra fee to add the living benefits rider.
Many term life insurance policies now include an accelerated death benefit rider for terminal illnesses at no extra cost. The critical illness riders and chronic illness riders can also be found on numerous life insurance policies at no additional cost, but it’s not as common as the terminal illness rider. Just remember that if these riders are included in the life insurance policy, the benefits payout is most likely an undefined payout amount.
Should you need to accelerate a portion of the death benefit, you may need to cover an administrative fee when receiving the payout. However, most insurance companies take this fee out of your policy.
For example, if you were to receive $50,000 and the administrative fee was $250, you would receive a payout of $49,750.
Instead of a fixed fee, some companies charge a percentage of the payout. For example, the insurance company may require a two percent fee on all payouts. If your accelerated benefit payout is $50,000, you will receive $49,000, and the insurance company would collect $1000.
Pros and Cons of Living Benefits Life Insurance
Living benefit riders are not for everyone. These extra provisions include their own advantages and disadvantages. The main reasons to consider getting living benefits life insurance include:
- Provides money if you get sick
- No Federal taxes on the payments received as living benefits
- The freedom to use the payout as you choose without any restrictions
- Death benefit protection and peace of mind knowing you have financial protection
As mentioned, you do not pay Federal taxes on the payments that you receive, but you may still need to pay state or local taxes.
Insurance companies do not place restrictions on how you spend the money. Living benefits give you the freedom to use the payout however you choose.
If you already have health care coverage for your illness, you may use the payout to cover alternative medicines, experimental treatments, or even a vacation.
You also gain peace of mind from the extra financial security. You already have life insurance to help care for your loved ones after your death. With the additional living benefit rider, you have coverage for any unforeseen medical issues.
Along with these advantages, you need to consider the disadvantages, such as:
- Reduced death benefit to your beneficiary if benefits have been accelerated
- Can be a lengthy wait time for a payout
- Administrate fees
- Not all claims receive approval
The main drawback to living benefits is that you may not have as much available for death benefits. The payout that you receive through the living benefits comes directly from your death benefit. This leaves fewer funds for your beneficiaries.
In some cases, you may need to wait two to three months before receiving the payment from your living benefits.
You should also keep in mind that not all claims receive approval. Every insurance company has their own list of qualifying events for accelerated death benefits and your rider may not include your current illness.
Of course, you also need to remember the fees and charges associated with living benefits. You may need to pay an extra fee to add a rider to your policy, especially if adding the rider after you obtain your policy. Your insurance company may also charge you an administrative fee.
Alternatives to Living Benefits Life Insurance
Besides life insurance policies, you have other sources for living benefits, such as:
- Accident Insurance
- Disability Insurance
- Long-Term Care Insurance
- Cancer Insurance
- Critical Illness Insurance
Accidental insurance pays out a lump sum benefit due to an injury caused by an accident. These plans are available for both accidents related to on the job as well as off the job.
Disability Insurance offers coverage for living costs and medical expenses when you can no longer work.
Long-term care insurance provides extra coverage for illnesses that require long-term medical services. These riders often include the same details as the chronic illness riders but with a defined payout.
You may also choose to receive separate cancer insurance or critical illness coverage. These options allow you to cover medical expenses separately from your insurance policy, ensuring that your death benefit remains the same.
Cancer insurance pays out a lump sum benefit to help with the costs associated with cancer treatment.
Critical illness provides a lump sum payout to help pay for costs associated with heart attacks, loss of hearing, vision, paralysis, kidney failure, and even cancer.
Conclusion – Should You Obtain a Living Benefits Life Insurance Policy?
Living benefits life insurance comes with many advantages and very few disadvantages.
When considering life insurance with living benefits, it’s important to understand that this is a life insurance policy first. In no way should a life insurance living benefits policy ever replace a health insurance plan as the two are not comparable.
Before investing in one of these riders, ensure that you understand the potential consequences. Receiving an advance payment from your life insurance policy takes away from the available death benefits upon your death.
If you want to avoid the possible drawbacks of living benefits, consider using one of the alternatives. You could sign up for an individual critical illness or cancer insurance policy. You could even look into a traditional disability income or long-term care policy as well.
Living benefits are best suited for those that want extra protection in case of a debilitating illness or terminal illness. To include one of these riders on your insurance policy, speak to one of our licensed insurance agents.
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