Pros & Cons of Living Benefits Life Insurance

Understanding the pros and cons helps determine if this fits your financial planning needs.

Whether you're exploring our best life insurance companies or considering comprehensive protection, evaluating these benefits and drawbacks guides your decision-making.

Understanding Living Benefits Life Insurance

Living benefits life insurance, also known as accelerated death benefits, allows you to access a portion of your death benefit while you're still alive.

These benefits activate when you're diagnosed with qualifying health conditions that meet specific policy criteria, providing financial support during critical health situations.

Traditional life insurance only pays out when you die, but living benefits provide financial support during critical health situations. You can use these funds to cover medical expenses, long-term care costs, or replace lost income during treatment.

Types of Living Benefit Riders

Companies offer several life insurance rider options that trigger under different circumstances:

• Chronic illness rider: Activates when you can't perform two activities of daily living for 90+ days or need supervision due to cognitive impairment.
• Critical illness rider: Pays out for specific serious conditions like heart attack, stroke, cancer, or organ transplant.
• Terminal illness rider: Provides benefits when certified with 12-24 months life expectancy.
• Long-term care rider: Covers extended care needs at home, assisted living, or nursing facilities.

Let's look at this in an example: if you're a 45-year-old marketing director with a $500,000 life insurance policy that includes living benefits, and you're diagnosed with cancer requiring extensive treatment, your critical illness rider would allow you to access $200,000 of your death benefit.

You could use these funds to cover medical expenses not covered by health insurance, replace lost income during treatment, and hire household help during recovery. Your remaining death benefit of $300,000 would stay intact for your beneficiaries.

Pros of Living Benefits Life Insurance

Living benefits life insurance provides several key advantages that make it attractive for comprehensive financial planning:

• Financial security during health crises: Creates a safety net when facing serious health challenges that can cost hundreds of thousands of dollars, even with health insurance coverage.
• Complete flexibility in fund usage: Use money for any purpose, including experimental treatments, home modifications, caregivers, or meaningful experiences with family.
• Potential tax advantages: Accelerated death benefits for terminal/chronic illness are typically not taxable income, though critical illness benefits may have different implications.
• Reduced family financial burden: Family members won't need to deplete savings or take on debt for your care, allowing them to focus on emotional support.
• Preserves other assets: Avoid liquidating investments or retirement accounts, maintaining long-term financial security, and avoiding early withdrawal penalties.

These benefits help cover expenses like specialist consultations, travel for medical care, income replacement during treatment, and household services during recovery.

Prudential Financial reports that less than 5% of policyholders typically use accelerated death benefits, while insurer case studies suggest claim amounts often range from $50,000-$100,000, though usage rates and amounts can vary significantly by company and product type.

Cons of Living Benefits Life Insurance

Despite their advantages, living benefits policies have several important drawbacks to consider carefully:

• Higher premium costs: Adding riders significantly increases premiums compared to traditional life insurance, with costs varying based on age, health status, and location.
• Reduced death benefit: Every dollar accessed reduces what beneficiaries receive, potentially impacting estate planning goals. Some policies also charge interest on accelerated benefits.
• Strict qualification requirements: Must meet specific medical criteria with detailed documentation and possible independent medical examinations during already stressful times.
• Coverage exclusions: Common exclusions include self-inflicted injuries, substance abuse, undisclosed pre-existing conditions, and waiting periods before benefits become available.
• Complexity and confusion: Multiple riders with different triggers and limitations make policies difficult to understand, compare, and may lead to disappointment when accessing benefits.

The qualification process can be lengthy, and some conditions that seem serious may not meet the policy's specific definitions, leaving you without access to benefits when needed most.

Another common misconception is that any serious illness automatically qualifies for benefits, when in reality, conditions must meet very specific policy definitions and criteria.

Pro tip: Industry experts suggest that adding living benefit riders can increase premiums by 15-25% compared to traditional life insurance, though this varies significantly based on individual circumstances.

How to Choose the Right Living Benefits Policy

Selecting the appropriate policy requires evaluating these key factors based on your individual circumstances:

• Assess coverage needs: Evaluate potential health crisis costs against current insurance and savings, considering family medical history and lifestyle risks.
• Compare policy terms: Review trigger conditions, exclusions, waiting periods, and benefit limits across insurers, as terms vary significantly between companies.
• Evaluate cost vs. benefit: Calculate additional premium costs and ensure they fit your budget without compromising other financial goals.
• Work with professionals: Partner with specialized agents and financial advisors who can explain complex terms and ensure coverage fits your overall strategy.

Factor in your career demands and likelihood of needing benefits to determine appropriate coverage amounts and which riders provide the most value for your situation.

Important Questions for Your Insurance Agent

When evaluating living benefits policies, ask the following questions to fully understand your coverage:

• What specific medical conditions qualify for each rider type?
• Are there exclusions or limitations I should know about?
• How much will living benefits increase my premiums?
• What percentage of death benefit can I access while living?
• How long are waiting periods before benefits become available?
• Do you charge interest on accelerated benefits?
• How does accessing living benefits affect my policy's cash value?

Alternatives to Living Benefits Life Insurance

Several alternatives provide similar financial protection during health crises, each with distinct advantages and disadvantages:

• Standalone critical illness insurance: Provides higher benefit amounts without reducing life insurance death benefits, but requires separate premiums and only covers critical conditions.
• Long-term care insurance: Offers comprehensive coverage for extended care needs at home or facilities but doesn't address acute illnesses or provide flexibility for other uses.
• Disability insurance: Replaces lost income during illness or injury but doesn't provide lump sum payments for medical expenses or other immediate needs.
• Personal savings and investments: Provides complete control and flexibility without premium costs but requires significant accumulation time and discipline.
• Health Savings Accounts (HSAs): Offers triple tax advantages for medical expenses and retirement savings but has annual contribution limits and usage restrictions.
• Reverse mortgages: Allows homeowners aged 62+ to access home equity during emergencies but includes significant fees and reduces inheritance for heirs.

Building substantial emergency savings requires time but offers no qualification requirements, while medical expenses can quickly deplete even large savings accounts. Consider your timeline, risk tolerance, and financial goals when comparing these options.

A standalone critical illness or long-term care insurance policy might provide you with more coverage, while personal savings offer complete flexibility without premium costs.

Conclusion

Living benefits life insurance offers financial protection during health crises, but higher premiums and reduced death benefits must be weighed against the security provided. Consider your current coverage, savings, and goals when evaluating if these benefits align with your needs.

Working with insurance professionals to compare multiple types of insurance ensures informed decision-making for your financial strategy. Remember you're paying for protection you may never use, but this approach provides appropriate family protection.

Frequently Asked Questions

1. What are living benefits in life insurance?

Living benefits are features that allow policyholders to access a portion of their death benefit while still alive if they meet certain conditions, such as being diagnosed with a terminal, chronic, or critical illness.

2. How do living benefits work?

If you qualify under your policy terms, you can request an advance on your death benefit. The insurance company deducts the amount from your eventual payout, meaning your beneficiaries will receive a reduced benefit when you pass away.

3. What are the main advantages of living benefits life insurance?

• Provides financial support during serious illness or disability

• Can help cover medical costs, long-term care, or lost income

• Offers flexibility to use funds however you need
• Reduces financial strain on your family while you’re still alive