What Is Living Life Insurance and How Does It Work?

Living life insurance refers to a feature within a life insurance policy that allows the policyholder to access a portion of their death benefit while still alive. This access is typically granted under specific circumstances, providing financial support. It is generally not a separate policy but rather an optional rider or an integrated component of a traditional life insurance contract. This feature provides a way to use future death benefits to address present financial needs.

Understanding Living Benefits

Living benefits are typically included as riders or built-in features, allowing policyholders to accelerate a portion of their death benefit under certain health conditions. One common type is the terminal illness rider, which generally allows access to funds if a physician certifies a life expectancy of 24 months or less. These funds are often used to cover end-of-life care or other immediate expenses.

A chronic illness rider provides benefits when the insured cannot perform a certain number of Activities of Daily Living (ADLs), typically two out of six (bathing, dressing, eating, toileting, transferring, and continence), or if they suffer from severe cognitive impairment. The inability to perform ADLs must be expected to last for at least 90 days, or the cognitive impairment must require substantial supervision. These benefits aim to help cover costs associated with long-term care, such as home health aides or nursing facility care.

Critical illness riders provide a payout upon diagnosis of a specified severe illness, such as a heart attack, stroke, cancer, kidney failure, or requiring an organ transplant. The specific conditions covered vary by policy, and there often are waiting periods or survival periods after diagnosis before benefits can be claimed. These funds can help manage medical bills, lost income, or other expenses arising from the illness. While distinct, a long-term care rider is sometimes considered a form of living benefit, offering funds specifically for qualified long-term care services, often with more comprehensive coverage than a chronic illness rider.

Key Features and Considerations

When living benefits are triggered, the payout structure can vary, often provided as a lump sum, a series of installments, or reimbursement for qualified expenses. The policy terms dictate how the benefit amount is calculated, frequently allowing access to a percentage of the policy’s face value, such as 25% to 90%, depending on the specific rider and the severity of the condition. This chosen amount directly reduces the death benefit that will eventually be paid to beneficiaries.

The funds received from living benefits are typically unrestricted, allowing policyholders flexibility in their use. They can be applied towards medical treatments, adaptive home modifications, daily living expenses, or other financial obligations. This flexibility allows individuals to tailor the use of funds to their most pressing needs during a difficult period.

Eligibility for adding these riders to a policy depends on several factors at the time of application or rider addition. Insurers often have age limits and a review of the applicant’s current health status is common. The availability of specific riders can also vary based on the type of life insurance policy, with some riders more commonly offered with permanent life insurance policies than term policies.

Claiming Living Benefits

Initiating a living benefit claim requires gathering specific information and documentation to support the qualifying condition. Policyholders should collect their policy number and the insurer’s contact details. Medical documentation is essential, including a physician’s statement confirming the diagnosis, detailed medical reports, and a prognosis that aligns with the rider’s criteria.

After compiling the necessary medical and policy information, the next step involves obtaining and completing the specific claim forms provided by the insurance company. These forms often require detailed personal information and a clear description of the condition being claimed. Policyholders can contact the insurer to request these forms.

Once all forms are completed and supporting documentation is gathered, the claim package can be submitted to the insurance company. Following submission, the insurer will review the claim. The review process can take a few weeks to several months before notification of approval or denial and an estimated payout schedule.

Tax Implications of Living Benefits

Accelerated death benefits received from a life insurance policy are tax-exempt under the Health Insurance Portability and Accountability Act (HIPAA) if certain conditions are met. For benefits paid to a terminally ill individual, the amount received is excluded from gross income. This exclusion applies to any amount paid out as an accelerated death benefit to someone certified by a physician as having an illness or physical condition expected to result in death within 24 months.

Benefits paid to a chronically ill individual are also excluded from gross income, provided the amount does not exceed certain per diem limitations. For 2025, this limit is $440 per day, or $160,600 annually, for qualified long-term care services, per IRS guidelines. Any amount exceeding this limit may be taxable unless the policyholder can show that the expenses incurred for long-term care services were greater.

However, if the benefit is paid for reasons other than terminal or chronic illness, or if the chronic illness benefit exceeds the qualified long-term care limits without corresponding expenses, the amount received may be considered taxable income. Consulting with a qualified tax professional is advisable for personalized guidance.