There are two main types of life insurance: term and permanent. Term is valid for a certain number of years (5,10, 15, 20, etc.) and provides coverage for that period of time. Permanent, on the other hand, is valid for your entire lifetime. It may also come with a cash value component that allows you to accrue money, in addition to offering a death benefit for your beneficiaries.
Both types of life insurance come with living benefits, benefits that you can use during your lifetime (as opposed to just the death benefit, offered to your beneficiaries after you die).
Due to the nature of both types of policies, the living death benefits play out differently with each.
Whole Life Insurance Living Benefits
The main living benefit of whole life insurance, the most popular type of permanent life insurance, is its cash value component. The cash value component of whole life insurance is often viewed as a valuable commodity, not only because it can be used during your lifetime, but because of the nature of the savings vehicle.
The cash value component grows tax-deferred, which means you don’t need to pay taxes on it as it grows. If you withdraw an amount that is less than or equal to your premium payment, you still won’t need to pay tax. Once you have withdrawn your entire basis, any money you withdraw from interest, dividends, or capital gain, will require taxes to be paid. However, if you instead access the cash value as a loan, as explained below, no taxes will be due, provided the policy stays in force.
Another living benefit of a cash value component is that you can borrow against it, usually at a lower interest rate than other loans. Borrowing against your cash value also means that you won’t need to undergo a credit check. During your lifetime, you can borrow against it to pay for college tuition, a wedding, a business venture, for health emergencies, to supplement your retirement income — for anything, really. The Balance has a good guide about whether borrowing against your cash value is a good idea and MarketWatch offers specific suggestions regarding borrowing against the cash value and paying for college tuition.
If you prefer not to borrow against it, you can directly withdraw the funds to pay for any of the above things (keeping the above tax ramifications in mind).
Some permanent life insurance policies offer a long-term care benefit as a policy add-on. This allows you to use funds from your death benefit for long-term care expenses during your lifetime. The amount you use will ultimately be subtracted from the death benefit your beneficiaries receive.
Living Benefits in the Form of Riders
Term life insurance, which doesn’t include a cash value component, offers living benefits in the form of riders. A rider is an extra benefit that can be attached to a life insurance policy for an additional cost (such as the long-term care benefit of permanent life insurance). Depending on your situation, you can choose the riders that you anticipate will come in handy. Most of these riders are available on permanent life insurance policies as well.
Riders that offer living benefits include:
Accelerated death benefit (also known as a critical illness rider)
This rider allows the insurer to pay out part of the death benefit during your lifetime in the event that you are diagnosed with a terminal illness and need help covering healthcare costs.
The thing to keep in mind about this rider is that you’re not getting extra cash in addition to the death benefit — this rider is more like getting an advance payment on the death benefit. The amount you withdraw during your lifetime will be deducted from the death benefit that your beneficiaries receive.
Return of premium
If you outlive the term of your life insurance, this living benefit rider pays you back all the premiums you paid during the term.
Disability waiver of premium
In the event that you are diagnosed with a long-term disability (six months or more), this rider allows you to forgo paying your monthly premiums.
This rider allows you to buy additional coverage without the need for another medical exam. This is particularly useful if you anticipate significant changes in your lifetime, such as getting married, having children, or getting a raise. It’s also a good rider to have if you’ve purchased relatively long-term coverage, such as 20 or 30 years, since your health may change during that span of time. If your health does decline, the ability to increase your coverage can save a lot of money in monthly premiums.
Life insurance, at its core, is a way of providing financial coverage to your loved ones in case you die. However, there are many living benefits associated with both whole and term life insurance that can be used to improve your quality of life during your lifetime. So when you’re deciding which type of policy to buy or from which insurer, asking about the living death benefits can help make your choice easier. If you have any questions or aren’t sure how to get started, Sproutt insurance advisors are available for free consultations.
Still have questions? We have answers! Read on to find the answers to all your questions regarding the living benefits of life insurance.
What exactly is a living benefit of life insurance?
A living benefit of life insurance is a benefit that you can enjoy during your lifetime, not only after your death. Different living benefits are available for both whole and term life insurance, and it’s important to clarify what’s available before buying a policy.
How much do living benefits cost?
The question of cost regarding living benefits depends on many factors. First and foremost, what kind of policy do you have? Second, what benefits do you need? Someone who adds one rider and someone who adds three riders can expect a significantly different cost. Similarly, whole life insurance and term life insurance are completely different, and the cost of living benefits reflects those differences.
In general, whole life insurance costs more than term (which is why term tends to be more popular). However, the higher monthly premiums for whole life insurance doesn’t mean you’ll have to pay extra to take advantage of its living benefits..
In fact, most of the built-in living benefits of whole life insurance don’t come at an extra charge, whereas living benefits that are in the form of riders do increase the amount you pay in monthly premiums.
Are the living benefits of whole life insurance worthwhile?
Most of the living benefits that come with whole life insurance are built into the policy itself, and you don’t need to pay extra for them. Therefore, the question isn’t “Are the living benefits worth it?” but “Is whole life insurance worth it?” When you buy whole life insurance, you pay significantly more than term, but you get all the benefits listed above:
- The death benefit
- Cash value that can be borrowed against or withdrawn during your lifetime
- Tax-deferred cash value growth
The question of whether these benefits are worth the cost of the monthly premiums is something only you can answer. But if you want some general guidelines, here is a great article that discusses whether whole life insurance is a worthwhile investment.
Are the living benefits of term life insurance worthwhile?
The question of living benefits and term life insurance, or the addition of riders to a permanent policy, is more complex, since you need to pay extra for these benefits. But it’s a highly personal question, and the question of being “worthwhile” depends on you. Most people buy term life insurance because of its “pureness,” the fact that it offers straightforward coverage and nothing more. However, some of the riders offer a lot of extra value and may be worth the extra cost in your particular situation. If you’re unsure, it’s best to contact an expert that can help you make the best decision possible.
What are the pros of buying life insurance with living benefits?
When it comes to whole life insurance, the living benefits that you receive are part and parcel of the entire deal. If you want life insurance that will offer a death benefit and act as a savings vehicle that you can use during your lifetime, whole life insurance fits the bill.
The pros of adding living benefits in the form of riders to life insurance vary according to the rider. Different riders offer different benefits. The accelerated death rider allows you to access part of your death benefit to pay for healthcare during your lifetime. The return of premium rider gives you a full refund of your premiums if you outlive the term of your policy. That can add up to thousands of dollars, depending on how long your term is. The waiver of premium is a valuable benefit that allows you to skip your monthly premiums in the event that you are diagnosed with a long-term disability. This rider keeps the full death benefit intact even though you aren’t paying the monthly premiums. Guaranteed insurability allows you to buy extra coverage without the need to requalify.
What are the cons of life insurance with living benefits?
While there are many pros of buying life insurance with living benefits, there are also some cons. When adding riders, living benefits may come at an extra cost. Additionally, any money withdrawn from the death benefit during your lifetime is deducted from the death benefit payout after you die. This is the main con riders.
With whole life insurance, most of the living benefits are built into the policy, so you don’t need to pay extra. The main downside is that whole life insurance is more expensive than term. You can see the difference in rates between term and whole life insurance here.
Why is guaranteed insurability considered a living death benefit?
Guaranteed insurability is a rider you can add to life insurance that allows you to buy extra coverage without the need for another medical exam. Why is this considered a living benefit? Usually, if you want to increase your coverage, you have to qualify. The older you are, the higher your premiums will be — this is true for any policy.
Statistically, the older you are, the more medical complications you are likely to have. And medical complications also impact the cost of monthly premiums. The benefit of guaranteed insurability, which allows you to skip the qualification process, can save thousands in monthly premiums should you decide to increase your coverage.