Life insurance has been around for centuries and most people understand the financial protection it can provide to your loved ones when you pass. More recently, life insurance companies have been adding benefits that can be used during the insured’s lifetime. We want to give you an idea of what these living benefits are.
What is the main purpose of life insurance?
The main purpose of life insurance is and will always be to provide your family and loved ones with money when they need it the most. We have never had a client’s family ask any questions about how much their loved one paid or what type of policy they bought, they were just thankful.
That being said, when purchasing life insurance, why not make it a policy that can work for your family as well as work for you when still alive? Living benefits allow you to utilize the policy while still living as you know how to properly use the policy.
Cash Value Life Insurance Simplified
Cash value life insurance has become a way for people to not only make sure their family is taken care of but also reduce their taxable income in retirement. While this doesn’t work with term life insurance (insurance that only lasts until you turn a certain age), it can work with any permanent life insurance. These policies, due to the way they are designed, are able to participate in the upside of the stock market without participating in the downside. They are safe, secure, and grow at a guaranteed rate.
Basically, once you reach a certain point in these policies (often 7 or more years), you can pull money from them, usually tax-free via loans or withdrawals of basis. If you do not pay the money back while you are alive, your policy’s death benefit will pay back the money at death. The amount borrowed is subtracted from the death benefit paid out and your beneficiaries will receive the remainder of the tax-free death benefit.
For example, many people use these policies to fund part of their retirement with tax-free loans or withdrawals. Say you have a policy with $1 million in death benefit and $750,000 in cash value. You could withdraw the cash value or receive the money as a tax-free loan, and at your death your loved ones will receive the remaining $250,000 tax-free.
It is important to note that some policies are much better designed to work with cash value withdrawals than others. If this is a feature you really want, make sure to shop around work with an advisor who offers multiple policies and can find one that suits your situation the best.
Life Insurance with Living Benefit Riders
If your policy does not allow for cash value, it is possible that you could have the option to add a living benefit rider to the policy at the time your purchase the policy. These riders are offered on term policies as well as permanent policies. Riders are additions that provide extra benefits. Living benefit riders also referred to as chronic care riders, critical care riders, or terminal care riders, depending on the level of care they will pay for. Some living benefits riders are usually marketed as “free” riders; you do not have to explicitly pay for the benefit like other riders (waiver of premium, disability waivers, etc.)
The riders and how they are paid out are going to vary from policy to policy. Some will pay out a certain lump sum, others will pay out a percentage of your death benefit based on your age and life expectancy. Typically, the payout is going to be tax-free. These payouts will reduce your remaining life insurance benefit, and the reduction usually includes a charge from the insurance company.
These riders are not available in every state or with every policy or company, but are a great option for people who want a little extra guarantee against health expenses and want to provide for their family at passing. Once again, make sure you shop around for these policies and understand what you are buying.
Hybrid Long Term Care Insurance Living Benefits
The risk of needing some form of long term care for every individual is 0% or 100%; you are either going to need it or you’re not. For that reason, many people do not want to purchase long term care insurance out of fear that they will pay for something they may never use. The government realized this, and in 2006, the Pension Protection Act was signed. This act made it possible for life insurance and annuity companies to add long term care benefits to regular life and annuity policies, which is what hybrid policies are, a combination of life insurance and long term care insurance.
If you end up passing before you need any long term care services, the full death benefit will be passed onto your family, just like a traditional life insurance policy. If you do need services, the policy will pay out a predetermined amount until you hit the maximum benefit, just like a long term care insurance policy. If you only use the long term care benefit for a short amount of time and do not reach the maximum benefit, your loved ones will still receive a death benefit, just reduced. You are never “wasting” your money; a benefit will be paid out of this policy if kept in force. If you would like to see specific comparisons of hybrid policies, you can do that here.
Life insurance can be abused and sold to the wrong person, in the wrong financial situation, with the wrong policy, but if you shop around, you can end up with a policy that not only takes care of your family but also gives you access to the money when you need it the most. Cardinal can help you evaluate your needs and find you a policy that gives you peace of mind.