It’s important to understand your motivations for wanting to purchase life insurance. It’s important that your premium dollars are helping you protect what matters most.
Having life insurance there for you when you need it can be a huge blessing, especially when you are at your most vulnerable. It’s important to ask yourself why you want to get life insurance coverage. What do you want it to do?
- Supplement our retirement income
- Give to a worthy charity
- Keep your business going, should you pass
- Replace the breadwinner’s income
- Provide a financial legacy to your heirs
- Provide debt protection
- Protect your assets should you need long-term care
- Pay for your funeral and it’s associated costs
Next, you need to zero in on the main financial reason why you want to get life insurance. Financially speaking, what do you want your insurance policy to do?
- Access cash values and a death benefit
- Low premiums for a short period of time
- Access to cash values, should you become terminally or chronically ill
- Access to cash values to pay for a downpayment on a home or college tuition for your children or grandchildren
- Provide a hedge against inflation in order to maintain your standard of living
- Have the flexibility to increase or decrease the premium or death benefit
- Flexible premium payments
- Potentially double your death benefit should die accidentally
- Return of premiums
Living benefits are categorized into 3 different categories of illness that allow you to be eligible for a payout.
There are three basic types of living benefit categories. Each category requires that you meet the qualifying criteria in order to be eligible to receive the living benefit payout.
- Critical Illness – to receive the living benefit payout for a critical illness, you must be diagnosed with a major medical health condition like cancer, stroke, or heart attack. Certain other qualifying health conditions may include blindness caused by diabetes, Lou Gehrig’s disease (ALS) or kidney failure.
- Chronic Illness – to receive the living benefit payout for chronic illness, you must be unable to independently perform two daily living activities. This may include dressing, bathing, toileting, eating and transferring. It may also be required that the policy to be in force for a certain number of years before the carrier will pay out. It’s best to check the policy’s waiting period so there aren’t any surprises.
- Terminal Illness – to receive the living benefit payout for terminal illness, you must be diagnosed with a terminal illness and have a life expectancy of 24 months or less. Check your policy as some states may require 12 months or less.
Once you receive the funds, you may spend them any way you wish.
All in all, living benefits should never be considered as a viable alternative to long-term care insurance, but it can offer a source of cash, should you be diagnosed with a qualifying medical condition. Ideally, it could stop your life savings from being depleted or protect other important financial resources.
Living benefits can help you at a time when you are at your most vulnerable.
Just within the last 5 years or so, some insurance carriers have been offering insurance policies with living benefits or accelerated benefit riders. The beautiful thing about living benefit riders is that it allows you to get part of your policy’s face amount – in some cases, up to 90% or more, if you are diagnosed with a serious life-threatening disease, such as cancer or some other qualifying condition.
Living benefits funds may be dispersed as either a one-time lump sum or through installments. The good thing about the living benefits funds is that the cash isn’t limited to paying the medical bills. The cash is yours so you can spend it on whatever you like.
Which means you can pay off your mortgage, pay for your daily living expenses, install a wheelchair ramp, buy a new car, or whatever you like. There are no strings attached. However, the cash that you receive will be applied against your policy’s death benefit. So, if the reason you took out the policy was to leave something behind for your heirs, then you need to take that into consideration, as you could be significantly reducing the death benefit.
Generally speaking, the money you get once you access your living benefits may not be subject to federal income tax, assuming that certain criteria is met, which basically means that you must be classified as being terminally ill.
Another good thing is that the living benefits you receive from your insurance policy usually aren’t subject to state income tax either, although this isn’t across the board in all states, so check to see if it applies in your state.
One important thing to note is that you will still be responsible for paying the monthly premium, even though the death benefit has been reduced. So it’s important to keep the policy in force.