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Living benefits life insurance

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When you purchase a life insurance policy, you select a death benefit, which eventually goes to your loved ones after you pass away. But did you know that it’s possible to use some of the money in your death benefit while you’re still alive? Many life insurance policies include living benefits, but there are certain limitations. In this article, we’ll explain everything you need to know about life insurance with living benefits.

What is a living benefits rider?

A living benefits rider is a provision on your life insurance policy that allows you to borrow money from your death benefit if you get diagnosed with a terminal illness. This endorsement is also called an accelerated death benefit rider. Most insurance companies automatically include this rider with your life insurance policy for free.

How living benefits riders work

When you claim a living benefits rider, you get access to some or all of the money in your death benefit. Technically, this money can be used however you choose, but it’s most commonly used to pay for end-of-life expenses, long-term care and medical bills. If you have term life insurance living benefits, you will likely not have to pay taxes on the money.

For example, say you are diagnosed with a form of terminal cancer, and the doctors estimate that you have 14 months to live. In that case, you would be able to use your living benefits rider to pay for treatment, hospice care or even a vacation. Here is a general idea of how a living benefits rider works:

Prove your illness

In order to use your accelerated death benefit, you first need to prove to your insurance company that you have been diagnosed with a terminal illness. Be prepared to submit your medical records and a physician statement. Many insurance companies will only approve accelerated death benefits for people whose life expectancy is less than two years. 

Find out how much money you can get

Some life insurance companies put a limit on the amount of money you can borrow using a living benefits rider. So if your policy is worth $100,000, you might not have access to the full $100,000. Depending on your insurance company, you may be limited to a percentage of your total death benefit or a maximum dollar amount. Before you file a claim, ask your insurance company what your policy allows. 

File a claim

To access your living benefits, you’ll need to file a claim with your insurance company. A claims representative will ask you to submit your medical records, primary care provider information and other claim paperwork. Once your insurance company has verified your condition, you’ll receive a check for the agreed-upon amount and can choose how to utilize those funds.

However, if you need money to pay for medical expenses or end-of-life costs, using an accelerated death benefit might not be your best option. A better alternative might be to borrow money from your policy’s cash value if you have permanent life insurance. That way, your beneficiaries will receive the full death benefit when you pass away.

Who can use a living benefits rider?

The only people who can use a living benefits rider are people who have been diagnosed with a terminal illness or another condition that will significantly shorten their lifespan. For example, if you’re 95 years old and believe you are near the end of your life, you would not qualify for an accelerated death benefit. Before your living benefits claim can get approved, your insurance company will validate your diagnosis with your doctor to ensure you are eligible.

Types of living benefits riders

Life insurance companies offer several types of living benefits riders. Each rider is designed to support people at the end of their life. These are the most common living benefits riders:

Terminal illness

The terminal illness rider allows people who have a terminal disease to claim money from their death benefit. In order to borrow the money, the policyholder must have a qualifying illness that is validated by a doctor. Examples of qualifying conditions include cancer, heart attack, stroke, organ transplants and paralysis. The policyholder must also meet certain requirements around life expectancy.

Chronic illness 

The chronic illness rider allows people to access an accelerated death benefit if they need assistance with basic, everyday activities. This rider often applies to people who have disabilities. To use a chronic illness rider, the policyholder must need help eating, bathing, using the bathroom, dressing or traveling for essential reasons, such as doctors’ appointments.

Long-term care

The long-term care rider allows people to use money from their death benefit to cover the cost of nursing homes, in-home care, hospice and other forms of long-term care. In order to use this rider, the policyholder must be able to prove that their long-term care needs are permanent. The long-term care rider is usually the most expensive.

Accelerated death benefit limitations

Accelerated death benefits can be valuable for many people. However, there are certain limitations to consider. Here are some of the biggest downsides to life insurance with living benefits:

  • You must be eligible: Not everyone can use the rider, even if it’s included with their policy. To borrow the money, you must meet certain requirements around the type of disease you have, and your projected life expectancy.
  • You may be limited in what you can borrow: You might not be able to borrow as much money as you want or need. Some insurance companies cap the amount of money you can take out, either as a percentage or a dollar amount.
  • Your beneficiaries get less money: Claiming money with a living benefits rider means that the total value of your death benefit goes down. When you pass away, your beneficiaries will receive less money as a result. 
  • There are fees: When you borrow money using a living benefits rider, it’s not free. Your insurance company will charge a fee that comes out of your death benefit.

The takeaway

  • A living benefits rider allows you to use money from your life insurance policy while you’re still alive.
  • Accelerated death benefits are only available for people who get diagnosed with a terminal illness and have less than two years to live.
  • Money from a living benefits rider can be used however you want, and it’s usually tax-free.

Life insurance with living benefits offers a certain added peace of mind. It allows you to borrow money in advance to help pay for end-of-life expenses, like long-term care and medical costs. It’s usually included with most life insurance policies for free. However, using a living benefits rider does have downsides. Most notably, it means that your beneficiaries will receive less money to live on after you pass away. When choosing to take advantage of your living benefits, keep all considerations in mind.

Elizabeth Rivelli

Elizabeth is an insurance writer for coverage.com, where she covers insurance providers and reviews policies to help consumers find comprehensive and affordable coverage for every area of their life. She has more than three years of writing experience for top online insurance and finance publications.

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