When it comes to the topic of life insurance and the thoughts surrounding it, most people immediately think about the death benefit to their loved ones so that they can be financially secure in their absence.
While that part is certainly true and of very high importance, what surprises people is to come to know that life insurance could also benefit you while you’re still alive. Hence the name LIFE insurance. You are able to utilize it while you're alive. Some life insurance policies come with living benefits—funds you can tap into while you’re still alive. These living benefits exist to provide financial support if you are diagnosed with a terminal illness, chronic illness or require long-term care. Certain kinds of policies can also help you build wealth, with “cash value” that can be accessed while you’re still alive.
Though no one likes to believe that a serious illness could happen to them, the truth is that it’s fairly common. For instance, close to 40% of people will be diagnosed with cancer in their lifetime. And research from the American Society of Clinical Oncology finds that treatment could cost around $20,000 to 30,000 a year, about half of the average annual U.S. household income. There is also a 70% chance that the average 65-year-old will need long-term care services, according to the U.S. Department of Health and Human Services.
Term Life Policy
- Terminal illness rider - Also called accelerated death benefits, this rider can help provide funds if you receive a terminal diagnosis that shortens your life expectancy to two years or less, depending on the policy. This rider can help cover end-of-life care and related expenses, but the benefit can also be used for things beyond that. For example, if you're healthy enough to travel, it can be used to take a vacation to a place you've always wanted to go. Many insurers add this rider automatically, but there may be a waiting period: the policy must be in force for a specified amount of time before you can access the benefit. Also, any amount that is advanced will be deducted from the benefit amount paid to your beneficiaries.
- Critical illness rider - This can provide funds to help pay medical expenses for certain qualifying illnesses that have high medical costs and shortened life expectancy – such as a stroke, heart attack, or kidney failure – that aren’t necessarily considered terminal. As with a terminal illness rider, this money is deducted from the benefit paid out after you die.
- Chronic illness rider - This is like a critical illness rider but applies if you are diagnosed with a chronic illness that prevents you from being able to complete at least two of six determined "activities of daily living" (ADLs). These ADLs include eating, bathing, using the bathroom, getting dressed, transferring, and continence. Again, any money advanced is deducted from your death benefit.
- Return of premium rider - This is actually a distinct kind of term policy that returns the premiums paid into your policy at the end of the term (assuming you don’t pass away, in which case the death benefit is paid out instead). This type of term life policy can be significantly more expensive than the typical term policy.
- Disability waiver of premium - This rider allows you to stop paying your premiums while keeping the policy in force if you suffer a disability (a covered injury or illness that keeps you from earning income).
Whole Life Policy
A permanent life policy will typically offer most of the optional riders noted above, but it also has an important feature that term life does not provide: cash value. So while permanent insurance is typically more expensive than term, most of the cost difference is because premium dollars can contribute to a policy’s cash account, where it grows tax-deferred, helping your family build wealth.
Cash value usually takes a few years to grow into a usable sum, but once that happens, it can become a financial asset with many advantages. Generally speaking, there are four ways to access life insurance cash value:
- Surrender - Cashing out your policy is usually not advisable, but it is possible. While you can cancel your policy and take the cash surrender value payment, you'll no longer have life insurance protection, and you may face significant surrender fees and/or taxes – but there are other ways to access those funds.
- Withdrawal - In many situations, you can withdraw cash from your permanent life policy. That money is often non-taxable as long as it's not more than the amount you've paid into the policy. However, the policy's death benefit will likely be reduced, and that reduction may be more significant than the amount withdrawn, depending on the terms of your policy.
- Loans - You can use your policy cash value to secure a loan that grows at a fixed or variable loan rate set in the contract. Rates can be competitive or lower than a personal loan and there is no application or credit check. You can even choose not to repay, but the outstanding loan balance will usually be deducted from your death benefit. Using policy loans to fund investments is a major component of the Infinite Banking Concept.
- Pay your life insurance premium - Want to stop paying premiums after you retire? You can often use the money in your cash account to pay part or all of your premiums, making it much easier to keep your cash value insurance coverage in place.
Life insurance with living benefits gives you the option to access your death benefit while you’re still alive. There are rules to determine your eligibility and limits on how much you may receive. Each insurance company has its own coverage options, rules and limits, so it pays to review policies carefully before buying life insurance. Family For Life Insurance is by your side to help you review how much you need and select the policy that addresses your major concerns.