When shopping around for life insurance, the primary focus will be on how your loved ones will be protected once you pass. However, while the death benefit is a significant part of any policy, it’s not the only option available.
In this article, we want to discuss living benefits for life insurance. Understanding these add-ons can help you make the right decision for both you and your family.
Life Insurance Basics: Term vs. Whole
One of the most crucial points to cover when discussing living benefits is how life insurance policies can differ. The two primary options are term and whole life insurance plans. Here’s a brief overview of how they work.
Term Life Insurance
With this kind of coverage, you pay premiums for a specified term, such as 20 years. Once that period expires, you lose the insurance. Any money you’ve put into the policy is also gone.
Term life insurance is cost-effective and straightforward, and in some cases, you may be able to put living benefits riders on your plan. We’ll discuss the specifics of those riders later in the article.
Whole Life Insurance
Rather than getting covered for a specific term, this kind of policy protects you forever as long as you continue to make premium payments. Your plan will never expire or mature.
Because of this long-term coverage, whole life insurance policies are more expensive. However, they do come with one substantial bonus – a cash value benefit.
Living Benefits and Cash Value
The simplest form of living benefits is when your whole life insurance policy accrues value over time. The longer you have the plan, the more money it will accumulate over the years.
It’s crucial to point out that this value might not be part of the death benefit. In fact, in some cases, you can’t simply roll over any remaining cash to your beneficiaries when you die.
So, that means you have to use it up while you’re still alive. Fortunately, there are multiple ways to take advantage of this benefit.
How Does My Cash Value Grow?
Since your premium payments are higher with whole life insurance than a term policy, part of that total goes into your cash value fund. With universal coverage, you can choose how much you want to pay extra, meaning that you can grow your money even faster.
However, there are several rules regarding universal insurance, which can make it less desirable than other forms of whole life insurance. Be sure to talk to your agent before signing up for a policy.
Another way that your policy grows is when the insurance company invests the money. Usually, these rates are relatively conservative, so you shouldn’t expect to receive high-yield returns. With a universal policy, you have a little more control, and you can choose variable indexed life insurance where you can invest in mutual funds.
However, while the reward can be higher, there’s also more risk, as your cash value could lose money in a downturn. This is another reason to discuss logistics with your agent beforehand. Check out more about universal life insurance here.
How to Utilize Your Cash Value
Although it can take years for this fund to reach a substantial amount, once it does, you don’t want to let it go to waste. Here are our top picks for what to do with this money. Also, depending on how much cash has accrued, you can mix and match these benefits however you like.
If you’re like most Americans, you’re not saving enough money for retirement. While life insurance cash value shouldn’t be your sole source of income during your golden years, it can be a reliable revenue stream.
For this option to work, you actually have to convert your policy into an annuity. Life insurance annuities are essentially a contract with the company. You pay a lump sum up-front, and the insurer will repay you over time.
Since you’re using your cash value, conversions don’t cost anything extra. Also, you don’t have to claim these earnings on your taxes until the first annuity payment comes in. This is known as a 1035 exchange.
There is a significant downside to this option – you do have to forgo your death benefits. However, if your beneficiaries are not in dire need of financial assistance, making the switch can be better for your plans. Also, depending on how you use the money, you can always tuck it away into an investment account for your beneficiaries later on.
If you still want to provide some coverage for your loved ones when you die, you can consider burial insurance. These policies have smaller death benefits and often don’t require a medical exam. Depending on your age and health, you might not have to pay too much in premiums. Check out more about burial insurance here.
Premium Payment Deferral
As you get into retirement, one of your primary concerns will be minimizing monthly expenses. Since whole life insurance policies can be costly, you might not want to continue paying them during your golden years. However, since you still want the death benefit, you can use your cash value instead of paying these premiums.
Depending on how much money is in your account, you could conceivably pay your insurance rates until you die. However, be sure to check in every so often to see how much of the cash value is left.
If you run out, the policy can lapse, and your loved ones will have no protection. Also, keep in mind that whole life insurance rates can go up as you age, so your premiums likely might not stay level forever.
There are plenty of occasions where you need to borrow a large sum of money. Whether it’s putting a down payment on a house or paying for a child’s education, taking out a personal loan from a bank can be problematic.
First, it will affect your credit rating, and you could wind up paying higher interest rates. Also, if you default on the loan, that can be a substantial black mark on your record.
A better option, however, is to borrow against your cash value. There are a few reasons to do this.
- Your Fund Isn’t Depleted – Rather than withdrawing money from your policy directly, the loan comes from the insurance company. So, technically your cash value can still earn interest while you pay back the loan.
- No Repayment Necessary – Depending on your situation, you may decide to forgo paying back all of the money you borrowed. If you don’t, that’s not a problem. The insurance company simply deducts the total from your account – no harm, no foul.
- Interest Payments Go Back to You – While the insurance company will take a cut of your loan repayments, most of it will return to the cash value fund. So, you’re essentially paying yourself back, not a bank. If you hate the idea of giving money away, a life insurance loan is a much better alternative.
- No Credit Check – Since the money is already in your account, the insurance company doesn’t have to run your credit to issue the loan. This benefit is particularly helpful if you already have bad credit since you’d have to pay much higher interest on a bank loan.
- Pay for Higher Education – Borrowing from your life insurance policy won’t count against your income level for financial aid. So, you can help your child get into a better school while still potentially qualifying for the FAFSA.
Increase Your Death Benefit
Not all life insurance companies allow you to roll over your cash value fund into the death benefit. So, if that is the case for your policy, keep that in mind when signing up. Even if you don’t have a particular need for the cash, it might be worth it to withdraw the funds as a loan and stick the money into a trust or investment account for your loved ones.
In those cases where the cash value can be lumped into the death benefit, you can ensure a more significant legacy for your family. Also, you might feel more comfortable naming multiple beneficiaries with the added amount since you know that the money can spread around more evenly.
Overall, except for life insurance annuities, you can adjust your planning based on various factors. For example, you might be planning to use the cash to pay premiums, but later on, you need the money to finance your child’s education. As long as you talk to your insurance agent regularly, you can determine the best option for you and your beneficiaries.
Living Benefits Riders
While a cash value benefit is a substantial way to profit from your policy, there are other ways to take advantage of life insurance while you’re still alive. Many insurance companies offer riders to these policies.
Each option is focused on a specific element and the rules regarding how they work vary between insurers. Also, some of these add-ons will increase your premiums, so you have to weigh the pros and cons beforehand.
One thing to keep in mind is that states have different rules regarding living benefits riders. So, if you have coverage and decide to move to another state, that could derail your planning. Be sure to research specific regulations before signing up.
Although each insurance company is different, here is an overview of the most common living benefits riders available.
Accidental Death and Dismemberment (AD&D)
One of the primary oversights of life insurance is what happens if you become permanently disabled due to an accident? For example, what if you lost a leg in a car collision and cannot work anymore? An AD&D rider works in a couple of different ways.
First, if you die in a qualifying accident, your beneficiaries will get a bonus lump sum with the death benefit. Second, if you lose two or more limbs or the use of your eyes, you can claim a portion of your benefit while you’re still alive. The plan’s specifics vary, and in some cases, the rider can be added for free.
Chronic Illness Rider
If you regularly find yourself in the hospital for a chronic illness, you can claim benefits from your life insurance. Usually, there are strict rules regarding what will qualify, and a medical practitioner has to sign off on your treatment.
Also, most insurance companies will verify your condition based on how well you can perform basic tasks, such as bathing and getting dressed. If the illness prohibits you from doing these activities, you can usually claim up to 90% of your death benefit to a certain cap (i.e., $500,000).
Critical or Terminal Illness Rider
Treatment for diseases like cancer and HIV can be costly in the U.S., and can quickly wipe out your savings. With a critical illness rider, you can use your death benefit instead.
Typically, these riders will specify conditions like cancer, meaning that you can file a claim once a doctor diagnoses you. In some cases, however, a terminal illness rider requires that you have been given 12 months or less to live.
Disability Rider or Waiver of Premium
While an AD&D rider only covers dismemberment, there are other ways you can become disabled. If you get a disability add-on, you can either claim some of your death benefit or obtain a waiver on your premiums. This way, you still maintain coverage without having to pay every month.
Usually, this waiver will expire after a certain period or once you reach a specific age. However, it can be quite helpful as you get accustomed to living with the disability. Once you’re stable again, you can resume making premium payments.
Contact NextGen Life Insurance Today
If you want to get the most out of your life insurance policy, you have to shop around. We make it easy to compare plans and rates so you can protect both yourself and your family. Don’t rush into any decision; let us help you make an informed choice.