Ordinarily, term life insurance only pays out a death benefit if you die during the policy’s term.
So, if you purchase a policy with a twenty-year term, and you die during that twenty-year period, the insurance company will pay the policy proceeds to your beneficiary.
But don’t die during the term, and the policy lapses without ever paying out.
It’s an all-or-nothing proposition.
By contrast, cash value life insurance policies like whole life and universal life accrue cash value and can therefore provide genuine financial benefits even while you’re still alive.
Among other things, a whole life policy’s cash value can be borrowed against, surrendered for cash, or annuitized over the rest of your life expectancy—all while you are still living.
If you need cash for an emergency or an unanticipated expense, wealth stored in a permanent policy can act as a savings source to get you over the hump.
Life insurance companies have recognized that—while some policyholders prefer the simplicity and inexpensive nature of term coverage—the availability of benefits during a policyholder’s lifetime may be whole life’s most attractive feature.
To satisfy these duel demands, insurance companies offer term life policies with living benefits.
The policies don’t accrue cash value like whole life, but they do offer supplemental protection against economic hardship resulting from major risks other than death.
But that raises an interesting question: if term life insurance, by definition, only pays out if the insured person dies during the policy’s term, how can term coverage provide benefits while the insured remains living?
Term Life Insurance with Living Benefits
So that brings us to an important question,
How Does Living-Benefits Life Insurance Work with Term Coverage?
Living benefits attached to a term life policy are usually conceptualized as “accelerated” death benefits.
That is, accelerated benefits are part of the policy. And if a qualifying condition is satisfied, the result is an early payment of some or all of the policy’s death benefit proceeds.
Basically, the insurance company is saying that, although the purpose of term life insurance is to protect against death, the insurer will pay out policy proceeds prior to death under certain, well-defined circumstances.
Living Benefit Riders
Typically, living benefits are included within term life policies through optional (or, in some cases, standard) riders.
Once a policy and living benefits rider are in place, the insurance company pays out policy proceeds “early” if conditions defined in the rider are satisfied.
So, for instance, a terminal illness rider might pay out term-life benefits if the insured is diagnosed with less than a year to live.
When a living benefits rider is triggered, the policyholder can (but doesn’t have to) submit a claim for payment up to the maximum allowable under the policy.
Living benefits riders usually set a percentage of the total death benefit that can be accelerated, sometimes subject to a yearly maximum.
For example, a chronic illness rider could limit total living benefits to 75 percent of the policy’s face value and allow up to 25 percent to be paid out per year.
In some cases, the available amount can also be tied to the severity of the condition upon which the claim is based.
Taps into Death Benefit
Importantly, when term life proceeds are paid out early as living benefits, the accelerated amounts are not paid in addition to the policy’s death benefit.
Instead, accelerated benefits are treated like an advance on the funds the insurer expects to pay out later.
As a result, the future death benefit (if triggered) will be reduced to account for any living benefits previously paid out.
Depending on the insurer, the death-benefit reduction might be a little more than the actual dollar amount paid as living benefits.
Life insurers often calculate reductions in future death benefits to reflect lost growth potential resulting from the earlier payout.
And some term policies with living benefits have fees associated with accelerated payments.
For example, say a living benefit rider results in an insurer paying out $20,000 in benefits two years earlier than anticipated. Had the insurer held that money for the extra two years, it would have earned additional investment income.
To make up for the lost returns, the policy language might say that the accelerated amounts credited against the death benefit include five percent annual interest, which in this example would equate to a $22,000 reduction when the death benefit is paid out two years later.
Living Benefits Available with Term Life Insurance
Most living benefits life insurance options for term policies are offered as riders that can be attached to a new or existing term policy.
Available riders vary between companies and from state-to-state, and a single policy can include more than one living benefits rider.
Some of the most popular living benefits riders offer coverage for chronic, critical, or terminal illnesses, or for long-term disability.
Chronic Illness Rider:
According to statistics cited by CDC, around three-fourths of annual American healthcare spending is related to treatment of chronic illnesses.
For individuals diagnosed with a chronic illness, a life insurance policy that can help defray some of the costs is a tremendously valuable asset.
A typical chronic illness rider requires certification by a healthcare provider that the insured has a medical condition preventing him or her from performing a specified number (often two) of “activities of daily living” (ADL).
ADL include washing, dressing, eating, using the restroom, and other everyday activities.
Depending on the insurer and the specific rider, the amount that can be accelerated may be limited by the actual expenses resulting from the condition or by the impact of the condition involved.
For example, an insured who is unable to perform any ADL may be entitled to a greater percentage of a policy’s face value than someone restricted in two or three ADL.
Chronic illness riders also usually include an annual payment cap along with a maximum aggregate amount that can be accelerated over the life of the policy.
Critical Illness Rider:
Most critical illness riders set forth a list of specific illnesses and major medical conditions that qualify as “critical” and can trigger accelerated benefits.
The precise conditions vary between policies, but, in general, they are very serious health issues like severe heart attacks, blindness, paralysis, lung cancer, ALS, and kidney failure.
To support a claim for accelerated benefits, the critical illness must be evidenced by a diagnosis from a physician.
Typically, funds available through a critical illness rider are defined as a percentage (often around 75-90%) of the policy’s face value, with some policies allowing greater or lesser amounts depending on the precise condition at issue.
Terminal Illness Rider:
Terminal illness riders are included standard in many newly issued term life policies.
Usually, a terminal illness rider is triggered upon a medical doctor’s diagnosing the insured as having less than one year to live.
Terminal illness riders frequently allow as much as a 100% advance on the policy’s death benefit.
The accelerated funds can then be used for the insured’s final medical expenses, to help set the insured’s affairs in order, or to help the insured stay as comfortable as possible during his or her remaining days.
Long-Term Disability Rider:
Insurance companies offer stand-alone disability insurance policies designed to protect against the financial consequences of long-term and short-term disability.
Those policies are different than life insurance, but some life insurance companies also offer disability-based riders that can be attached to term life policies—allowing a term policy to help alleviate some of the burden of a disability.
It’s important to recognize that disability insurance and term life with disability-related living benefits are two different products with related but distinct functions.
Separate disability insurance provides more comprehensive and direct protection against disability.
A disability rider, though, can be a big help for someone whose primary need is life insurance but who likes the idea of supplemental protection in the event of disability.
Not all insurers offer disability riders with term life. But, among those that do, the disability income rider is the most common form.
The way the riders generally work is that, if you have a diagnosed disability that keeps you from working, the insurance company will pay out a defined amount per month to help defray the lost income.
If the disability later subsides, the monthly payment will cease, but you can usually keep the life insurance coverage in place if the term hasn’t lapsed and you continue paying the premiums.
Disability Waiver of Premium Rider:
Another disability-based option waives your obligation to pay premiums if you become disabled. A premium-waiver rider won’t pay out any policy proceeds to you, but it will let you keep the insurance policy in place without further premiums while you remain disabled.
So, the policy still provides financial protection for your family in the event of death but without the premiums eating into your monthly budget while you are unable to work.
Premium Costs Associated with Living Benefits
A big part of what makes the cost of term life insurance so affordable is that most people don’t die during the term and, therefore, only a small minority of policies result in a payout by the insurance company.
The large majority of policies that are never triggered effectively subsidize the few that are. Adding living benefits, though, increases the chance that a policy results in a payment from the insurer. And, as a consequence, a term policy with living benefits will have higher premiums than a policy without them.
Exactly how much higher the premiums will be is dependent on the specific living benefit rider and the chances of it being triggered, as evaluated by the insurance company.
Like term life coverage itself, living benefits riders are subject to underwriting approval.
Thus, if an applicant has a medical or family history suggesting that a certain living benefits rider has an exceptionally strong likelihood of being triggered, the applicant may have to pay substantially higher premiums for the rider or may not be eligible for that particular rider at all.
For the most part, living benefits riders are also more likely to be triggered by older applicants.
Statistically, the older you are, the more likely you are to be diagnosed with a major health problem.
As a result, the additional premiums required for a living benefits rider will be lower if you obtain coverage earlier in life.
Another factor worth considering is that many life insurance companies now offer living benefits riders as part of their standard term life policies.
Terminal illness riders in particular are now included in many term policies at no additional charge.
For some applicants, it may be cheaper to find an insurer who includes a desired living benefits rider in every term policy it issues—rather than purchasing the rider a la carte from an insurer who offers it at an additional cost.
There are many companies out there and many different term life insurance riders to choose from. We hope this article helped equip you to make the best deicsion for you, based on your unique needs and goals.
The team at IBUSA is here for you. We can help align you with the right policy, at the right price.
Let us use our expertise on your behalf to shop for the best term life insurance with living benefits in the market place.
So what are you waiting for? Give us a call today and experience the IBUSA difference.