If you have done your financial planning homework there is a good chance that you own a life insurance policy. You know how much you need and whether to buy term life or permanent life. If you bought your life policy more than 7 years ago then you probably haven’t heard of the living benefits rider. This feature that is being added to mostly term policies (some permanent policies also offer this feature) is changing the way we think about life insurance.
What is living benefits?
The living benefits can be an add-on to your life insurance policy. Some companies have also started to include them at no extra cost. This benefit allows you the access to the death benefit under certain medical situations.
Also called an accelerated benefit rider, depending on the insurance carrier, the living benefit rider allows the owner of the policy access to a portion of the death benefit early (before death) in the event of a major medical diagnosis or terminal illness. A serious medical diagnosis could affect your ability to work. If you have this rider it would offset this by allowing access to the death benefit early.
What does it pay?
If you have a serious medical condition and qualify for the living benefits rider, then you can expect to have access to somewhere between 24%-80% of the death benefit. This is all determined by the medical condition that you were diagnosed with, it’s severity, and your life expectancy at that time. The more severe the higher percentage you are able to receive. You are also able to receive the benefit once a year if the condition is ongoing. Remember that if you do receive funds early from the living benefits rider, that amount is subtracted from the death benefit upon your death.
What medical conditions qualify?
- Any condition that leaves your life expectancy at 24 months or less. (Some carriers are 12 months or less)
- Any condition that will not allow you to do 2 of 6 ADL’s (Activities of daily living). The 6 ADL’s are bathing, continence, dressing, eating, toileting and transferring.
Other health conditions that would trigger the living benefits rider:
- Heart Attack
- Vision, Hearing, or Speech Loss
- End Stage Renal Disease (Kidney Failure)
- Multiple Sclerosis
- Aortic Surgery
- Parkinson’s Disease
- Severe Burns
There is always a section in your life policy that will detailed out what is covered and what isn’t. We always recommend looking this over.
Are the benefits taxable?
Anytime you receive money from a life insurance policy could cause tax implications if not planned accordingly. The best thing about the living benefits rider is the benefit is federally tax-free. All payouts after January 1, 1997 are free from federal taxes. However, your state may have different tax laws, so you will want to investigate.
Are they any fees associated with this rider?
We all know that business is business and that is no different with life insurance carriers. They are in business to make money. With this said these riders do have fees associated with them.
The easiest fee to understand is the increase in premium. While some companies have this rider already built-in at no extra cost, some do charge extra to “add” this rider. The fee for the rider is based on the amount of death protection you choose. If you choose a high death benefit, then the rider will cost more. Even with the extra cost, this rider is really inexpensive especially compared to the potential value if tragedy should strike.
Another fee that may occur is when you are approved for a claim and receive a pay-out. This pay-out usually comes with a set fee for the processing of the claim and is set by the insurance carrier at the time when the policy was bought. This will be declared in your contract.
If you look at what the cost of rider is and compare it to the potential benefit, this is a no brainer. We all know with modern medicine we are living longer with some of the medical conditions listed above. Although it’s great that we are living with these ailments, these ailments could be disabling. This could cause a lot of financial stress that could be relieved by having a living benefits rider attached to your policy. I recommend seriously looking into adding this to your financial portfolio. If you have any questions please comment below or give us a call.