Conventional wisdom tells us that life insurance benefits our loved ones upon the time of our death. But the truth is, some life insurance policies come with living benefits – funds you can tap into while you’re still alive.
Two types of coverage
Term life and permanent life are two main types of insurance coverage with different living benefits and features. While term life covers you for a set amount of time or term, permanent life covers you for your entire lifetime for as long as you pay your premium. Both come with death benefits or the lumpsum of money paid to your beneficiaries in the event of your death.
Living benefits for term
In terms of living benefits, term life’s include the following:
- Accelerated death benefit – Also called life benefit rider, this living benefit lets you take an advance on your death benefit money if you’ve been diagnosed with a terminal illness. Depending on your policy’s definition of terminal illness, it could be a life expectancy of one year or less. By taking all or a portion of your death benefit, you could use this money to pay for end-of-life care and other related expenses. The trade-off is it reduces the death benefit available to your beneficiaries when you die.
Other variations of accelerated death benefit riders let you access living benefits for chronic illness or critical illness. Chronic illness is defined as a condition that prevents you from performing at least two of the six “activities of daily living” (ADLs), namely, bathing, eating, getting dressed, toileting, transferring and continence. While the critical illness rider covers illnesses that shorten life expectancy such as heart attack, stroke and kidney failure.
- Return of premium – All premiums paid during the term are returned to you if you don’t pass away during the term. This type of policy often costs more than the traditional term life.
- Disability waiver of premium – In the event you suffer from a long-term disability for 6 months or more, this rider lets you skip your premium payments.
Living benefits for permanent life
Like term life, permanent life offers you the option of accelerated death benefits. But unlike term life, permanent life lets you accumulate cash value on a tax-deferred basis. While cash value takes a few years to grow into a significant sum when it does you can tap into this fund throughout your lifetime in 4 different ways:
- Withdrawal – You can withdraw a portion of the cash value of your policy – tax free – as long as the amount is not more than the premium you paid for the policy. Note, however, that the amount you withdrew will be deducted from your policy’s death benefit if it’s not repaid.
- Policy loan – You can take out a loan against your permanent life policy. Rates are lower than a personal loan and there are no credit checks or long list of restrictions.
- Surrender – You may cancel your permanent life policy to access the cash value portion as a one-time lumpsum. The amount you receive will be less any outstanding loans and/or unpaid premiums.
- Long-term care benefits – You may tap into your death benefits to cover for long-term care expenses that your health insurance doesn’t provide. However, your death benefit will be reduced by the amount of long-term care benefit that you use.
Finding the right fit
Make the most of your life insurance by choosing the living benefits that fit your needs. Ask a licensed insurance agent to walk you through your options. Be it term life or permanent life. For professional advice, talk to our Mercado Global Insurance Brokers. Our extensive experience allows us to understand your needs so we can help you find the right insurance policy that works best for you.
