What Are Living Benefits in Life Insurance?

Life insurance policies are primarily designed to provide financial support to beneficiaries after the insured individual passes away. However, many policies now include living benefits, which allow policyholders to access a portion of their death benefit while they are still alive. These provisions are intended to help individuals address significant financial needs that may arise during specific life events, particularly those related to health challenges. Living benefits can offer financial flexibility when facing unforeseen circumstances, enabling policyholders to utilize funds from their policy for various expenses.

Understanding Living Benefits

Living benefits represent a significant evolution in life insurance, offering financial relief during a policyholder’s lifetime. Their purpose is to provide access to funds for individuals confronting serious health or life challenges, such as a terminal or chronic illness. These benefits are typically incorporated into a life insurance policy as riders or integrated features, intrinsically linked to the underlying life insurance coverage.

A fundamental distinction between living benefits and traditional life insurance lies in the timing of the payout. While a standard life insurance policy pays out to beneficiaries after the insured’s death, living benefits enable the policyholder to receive a portion of the policy’s value while still alive. Accessing these funds generally reduces the eventual death benefit that will be paid to beneficiaries.

The availability and specifics of living benefits can vary between term life insurance and permanent life insurance policies. Term policies often offer living benefits through optional riders, which come with an additional cost. Permanent life insurance policies, such as whole life or universal life, often include a cash value component that can be accessed during the policyholder’s lifetime. This cash value can be accessed through loans or withdrawals, though these actions can also impact the death benefit.

Common Types of Living Benefits

Several common categories of living benefits are available, each designed to address specific health-related contingencies. These benefits are triggered by defined circumstances, providing financial support when it is most needed. The unique conditions for activation for each type should be understood.

Accelerated Death Benefits

Accelerated death benefits, often referred to as terminal illness riders, allow policyholders to access a portion of their death benefit if they are diagnosed with a terminal illness. This typically means a physician has certified that the individual has a limited life expectancy, commonly defined as 12 or 24 months. Funds from this benefit can be used for various purposes, including medical costs, hospice care, or to alleviate financial burdens during the final stages of life.

Chronic Illness Riders

Chronic illness riders provide access to policy funds when an individual is unable to perform a specified number of daily living activities (ADLs) or requires substantial supervision due to cognitive impairment. Standard ADLs usually include:
Bathing
Continence
Dressing
Eating
Toileting
Transferring
To qualify, a licensed healthcare practitioner typically must certify that the individual is unable to perform at least two ADLs for a continuous period, often 90 days, or has a severe cognitive impairment.

Critical Illness Riders

Critical illness riders are triggered by the diagnosis of specific, predefined critical illnesses. These illnesses often include conditions such as heart attack, stroke, cancer, kidney failure, major organ transplant, and blindness. Upon diagnosis of a covered illness, the policyholder may receive a lump-sum payment, which can be used to cover medical expenses, replace lost income, or manage other financial needs. The specific list of covered illnesses can vary between insurance providers.

Long-Term Care Riders

Long-term care riders are designed to help cover the costs associated with long-term care services, such as nursing home care, home health care, or assisted living facilities. The activation of these riders is often based on similar criteria to chronic illness riders, requiring certification of an inability to perform a certain number of ADLs or cognitive impairment. These benefits provide financial assistance for ongoing care needs, which are typically not covered by standard health insurance or Medicare.

How Living Benefits Operate

Accessing living benefits involves a specific process to ensure the policyholder meets the established criteria for a claim. The initial step typically requires the policyholder, or their representative, to contact the insurer and provide documentation to prove a qualifying event has occurred. This documentation usually includes medical certifications from licensed healthcare practitioners, diagnostic reports, and other relevant medical records that substantiate the terminal illness, chronic condition, or critical illness as defined by the policy.

Once the claim is filed and the eligibility is verified, the funds are disbursed according to the policy terms. Payout mechanisms can vary; some policies offer a lump-sum payment, while others may provide installment payments over a specified period. The amount received is generally a percentage of the policy’s death benefit, and insurers often have limits on the maximum percentage or dollar amount that can be accelerated. For instance, some policies may cap the withdrawal at 50% of the death benefit or a specific monetary limit, such as $250,000.

From a tax perspective, accelerated death benefits received by a terminally ill individual are generally excluded from gross income for federal tax purposes, as long as a physician certifies a life expectancy of 24 months or less. For chronically ill individuals, accelerated benefits are also generally tax-free if used for qualified long-term care expenses. However, if the amount received exceeds IRS per diem limits (e.g., $420 per day in 2024) and is not for actual long-term care expenses, the excess may be taxable. Critical illness payouts are typically not taxable if the premiums were paid with after-tax dollars. Receiving living benefits could impact eligibility for income-based government benefits, such as Medicaid or Supplemental Security Income (SSI).