What are living benefits in a life insurance policy?

This article will ... Provide a definition of living benefits, which can cover a variety of features, notably accelerated death benefits.  List the ways that living benefits can be included in life insurance policies. Describe how living benefits work and warn about their intricacies.

Beyond the basic death benefit protection that life insurance offers when someone dies, there are features some policies offer that can benefit a policyowner while alive as well. These features fall under the heading of “living benefits.” And with the growing longevity of the U.S. population, some of these living benefit features, like accelerated death benefits, are getting particular attention.

Living benefit definition

Technically “living benefits” is a general term essentially describing a category of features that allows the owner of a life insurance policy to benefit from the policy while the insured is still alive.

These can include the features basic to permanent life insurance, like the ability to borrow from the cash value of a life insurance policy.¹ (Related: Why you should treat cash value with care)

But the living benefit category also includes a subset of provisions — sometimes referred to as accelerated death benefits — that allow the policyowner to receive a portion of the death benefit in advance of the insured’s death if certain conditions are met.

Depending on the specific type of living benefit involved, such funds could be used to help pay for medical care, hospice services, nursing home care, in-home caretakers, or other expenses associated with terminal or chronic illness.

“Living benefits are becoming more important within life insurance for one main reason: the general phaseout of stand-alone, long-term care policies,” said Doug Collins, financial planning director for Fortis Lux Financial in New York City. “Fewer and fewer companies are offering long-term care insurance by itself. The trend in the industry is to package long-term care benefits within permanent insurance.” (Related: How whole life insurance can help through life stages)

Common types of living benefits

Many of these benefits take the form of a rider on a life insurance policy. Riders are essentially additional benefits added to an insurance policy that can customize it to address specific needs or concerns. Riders typically come with an additional cost to the policy. But in the case of some living benefit riders, they may be a standard part of the policy and included at no additional premium (although, if exercised, there may be a charge). (Related: Understanding riders)

Riders providing such living benefits — sometimes generally referred to as accelerated death benefit riders — include provisions for:

• Terminal illness. This rider allows the policyowner to receive an advance of policy death benefits when the insured is diagnosed with a terminal illness that is expected to result in death within a specific period of time, typically one year. This provision is sometimes offered at no additional charge by the insurance company. But the benefits provided through this provision, along with an additional charge, are deducted from the death benefit.
• Critical illness. This benefit may become available when the insured is affected by certain serious illnesses that may have life-threatening consequences — but aren’t necessarily terminal. Examples include heart attacks and strokes. The type of illness that qualifies under this benefit will depend on the terms of the policy. And like the terminal illness rider, accelerated death benefits paid out will be deducted from the ultimate death benefit.
• Chronic illness. This benefit may become available if the insured is diagnosed with a chronic condition that impedes their ability to complete two out of the six "activities of daily living” (eating, bathing, toileting, dressing, transferring, continence) or becomes cognitively impaired. Chronic illness riders are often indemnity benefits — meaning you only have to qualify and you receive a benefit, which you can use however you choose. Like the other illness-related riders, benefits paid under the provision will reduce the amount of the eventual death benefit paid out.
• Long-term care. Similar to a chronic illness rider, a long-term care rider may allow you to use part or all of the policy's death benefit to pay for qualifying long-term care needs. But your condition has to qualify, meaning it has to meet the conditions laid out in the policy, which usually include an inability to perform at least two of the ADLs listed above or cognitive impairment. Additionally, a long-term care living benefit can be used multiple times over the years, provided that there are benefits remaining to use.²

“Living benefits purchased as riders on life insurance policies offer great value in addition to the death benefit,” noted Jeffrey Rotman of Rotman & Associates in Boca Raton, Florida. “The most popular are the terminal illness rider — generally provided at no cost — and the chronic illness rider.”

Rotman noted that many people are turning to living benefit riders on life insurance policies as an alternative to long-term care insurance, which has become expensive with generally increasing longevity. (Related: Is paying for long-term care part of your retirement plan?)

How accelerated death benefits work

In order to access the benefits discussed above, a policyowner would need to qualify under the terms of the rider/benefit by providing proof, for example, that they are chronically or terminally ill. And that proof needs to meet the terms of the policy.

“It is crucial to know what you are getting in terms of these living benefits,” cautioned Collins. “Some policies offer a no-cost rider that accelerates the death benefit for a terminal or chronic illness, which is often a strict definition and can be mistaken for traditional long-term care if not understood properly. If you are looking for a policy that provides both a permanent death benefit and possibly long-term care help, this is typically attached as a rider, sometimes with a cost to it, but more often than not is well worth the cost as part of your premiums.”

These accelerated death benefit type of living benefits are sometimes paid out in a lump sum, except in the case of long-term care specific benefits, which generally provide monthly payments. But, depending on the policy terms and benefit involved, payment frequency can differ. And typically, the benefit received through such provisions is not taxed as income.³ And, again, taking accelerated death benefits will reduce the amount of death benefit received by beneficiaries.

Related types of benefits

There are other vehicles under the living benefits category that, while not accelerated death benefits, also offer help to a policyowner in the event of a problem with their health.

• For instance, some life insurance policies offer a waiver of premium rider that allows for premium payments to be waived if the insured becomes totally disabled as defined by the rider.
• In a similar vein, some life insurance companies offer riders that credit the policy’s account value with a predetermined monthly benefit amount in the event of disability. These riders are available for an additional charge or premium. Many insurance professionals suggest looking at other options, like disability income insurance, before adding such riders.

A financial professional can help sort out what kind of may be applicable to individual situations and at what cost. (Need a financial professional? Let us know or find a MassMutual financial professional here).

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