When most people think about a life insurance policy, they tend to focus primarily on the death benefit which is the main risk they are insuring against. However, there are other risks that need to be considered.
MEDICAL BANKRUPTCIES MAKE UP 50% OF ALL BANKRUPTCIES FILED
Many life insurance products also offer an optional rider that will provide what is known as ‘Living Benefits’. Living benefits are often called ‘Accelerated Benefits’ or ‘Accelerated Death Benefits’ and they are a great way to protect other financial assets when unfortunate events happen. The good news is that in many cases, the optional policy rider (add-on) is included at no additional cost.
Depending on the particular life insurance product, living benefits provide income to a family should a qualifying terminal, chronic illness, critical illness or critical injury occur to the insured family member. This money can be used to offset the unplanned costs associated with the event like out-of-pocket medical expenses or lost earned income.
The qualifying factors for accelerated death benefits vary with both the policy issuers (the insurance company) and within the policy itself. However, here are some of the typical definitions:
Terminal Illness – A living benefits claim can typically be made if the policyholder is diagnosed with a terminal illness from which they are expected to die within 12-24 months of diagnosis AND by a physician who specializes in that illness or condition. While extremely unfortunate for the insured, it does help the family through the final period of the insured’s life from a financial perspective.
Chronic Illness – To qualify for this claim, the insured’s physician needs to certify that the insured, for a period of at least 90 days, is unable to perform at least two Activities of Daily Living (ADLs) or suffers from severe cognitive impairment. The six basic ADL include bathing, dressing, eating, transferring, toileting and continence.
Critical Illness – This qualifying event is more focused on a single, serious medical event that can cause financial hardship. The insurance company will compensate the policyholder with a lump sum payment. Policyholders will use this to cover out-of-pocket health care costs due to their illness and the list of illnesses (heart attack, cancer, stroke) that are covered are typically listed in the policy.
Critical Injury – Similar to a critical illness, the insurance company compensate the injured policyholder with a one-time lump sum payment to reduce the impact of an injury that requires significant recovery time and the potential for lost earned income and unplanned out-of-pocket medical expenses.
IMPACT TO THE DEATH BENEFIT
The actual payment the insured receives in a living benefits claim will be less than the portion of the death benefit accelerated because the benefits are paid prior to death. Values are based on current interest rates, the age of the policy, and the insured’s age & health but can be a very high (50% or more) of the death benefit.
Also, the policyholder must continue to make premium payments while receiving the living benefits
TAXES AND OTHER CONSIDERATIONS
In the case where the Living Benefit is received due to a terminal illness, the living benefits should be tax free just like the death benefit for the beneficiary. However, the income received in the other situations could have tax implications so that is something the policyholder should discuss with their tax consultant.
Also, receipt of a lump sum of cash through an accelerated death benefit could change the financial status of the insured and possibly disqualify them from receiving Medicaid or Supplemental Social Security benefits.
Living Benefits are a relatively new option available in many Life Insurance policies and provide another great way to help protect your family and weather the storm when ‘life happens’.
Learn more about Living Benefits in our ‘Money 101’ workshop