Living benefits on life insurance, explained
Some life policies let you use part of the death benefit while you are still alive if you become terminally, chronically or critically ill. Here is how accelerated death benefit riders work and what they cost you.
Living benefits are features, usually called accelerated death benefit riders, that let you receive part of your life insurance death benefit while you are still alive if you have a qualifying terminal, chronic or critical illness. The money is advanced from the death benefit, so whatever you take reduces what your beneficiaries receive later. These riders can turn a policy into a source of cash during the hardest time in a family's life, but the triggers, limits and costs vary widely from policy to policy, so it pays to understand them before you buy rather than after a diagnosis.
The three common triggers
The exact definitions are in the rider, and they matter. Two policies can both say critical illness and cover very different lists of conditions.
Some term policies include a terminal illness rider at no extra cost, while chronic and critical illness riders may be included, cost extra, or not be offered at all. The lowest term quote is not always the right choice if it leaves these out. When we compare policies, we compare the rider language side by side, not just the premium.
| Rider type | Usually triggered by | How it tends to be used |
|---|---|---|
| Terminal illness | A doctor certifies a life expectancy of 12 to 24 months or less, as defined in the policy | Medical bills, time off work, putting affairs in order |
| Chronic illness | Being unable to perform two of six activities of daily living, or severe cognitive impairment | Paying for care at home or in a facility |
| Critical illness | A diagnosis listed in the policy, such as certain heart attacks, strokes or cancers | Treatment costs and lost income during recovery |
How the money is calculated
When you accelerate a benefit, the insurer pays you part of the death benefit early. Policies handle the cost in different ways.
Ask for an example in writing. A good illustration shows how much cash you would receive if you accelerated a certain amount today, and how much death benefit would remain. If the numbers are not clear, keep asking until they are.
- Discount method: the insurer pays less than the amount of death benefit you give up, to reflect paying early.
- Lien method: the advance is treated like a loan against the death benefit, with interest.
- Premium charge: some riders cost an extra premium up front, and pay a set percentage when triggered.
- Most riders cap how much you can take, often as a percentage of the death benefit or a dollar maximum.
Taxes and benefits programs
Under federal tax law, accelerated death benefits paid to someone who is terminally ill, or chronically ill and using the money for qualified care, are often received income tax free, within limits. The rules are detailed, so check with a tax professional before you claim.
A lump sum can also affect eligibility for needs-based programs. In Arizona, that includes AHCCCS and the Arizona Long Term Care System (ALTCS), which count your resources. If you might need those programs, plan the timing with care.
If you run a business or depend on disability income insurance, check how an accelerated benefit interacts with those as well. A living benefit is designed to help in a crisis, and it works best when it fits with the rest of your financial plan rather than surprising it.
Living benefits are not long-term care insurance
A chronic illness rider can help pay for care, but it is not the same as a long-term care policy. It spends down your death benefit, the monthly amount may be limited, and the definitions can be narrower. For many people it is a useful extra layer. For people whose main worry is a long period of care, a traditional or hybrid long-term care policy is usually the better tool, and Viola, as a Certified in Long-Term Care advisor, can compare them for you.
A related option is a hybrid policy that is built around long-term care from the start. Our guide to hybrid versus traditional long-term care insurance explains how those differ from a chronic illness rider on an ordinary life policy, and why the definitions in the contract matter so much.
What to ask before you buy
Riders are approved state by state, so not every feature in a national advert is available on every policy sold in Arizona.
Living benefits are most valuable when they are in place before anything goes wrong. Once a diagnosis happens, it is usually too late to add a rider or buy a new policy with these features, which is another reason to review your life insurance while you are healthy.
Write the answers down and keep them with your policy.
- Which riders are included automatically, and which cost extra?
- What exactly triggers each one, word for word?
- How much can be accelerated, and how often?
- How is the payout calculated: discount, lien or prepaid premium?
- Does using the rider change my premiums or my remaining coverage?
- Is the rider approved for policies sold in Arizona?
A real-world way to think about it
Picture a 52 year old in Mesa with a term policy that includes a critical illness rider, who is diagnosed with a covered cancer. Health insurance pays the treatment bills after the deductible. The rider lets them take part of the death benefit early to cover the months they cannot work and the costs health insurance does not touch, such as travel to treatment and help at home.
If they recover, the remaining death benefit stays in place for their family. If they do not, the family receives the death benefit minus what was advanced. Either way, the money arrived when it was needed most. That is the whole idea of living benefits, and it is why we review the rider language with every client who buys term coverage.
Families who have used a living benefit often say the money mattered less than the choice it gave them: time off work to be with a spouse, or the ability to say yes to a treatment center farther from home without worrying about the cost of getting there.
Riders that are not living benefits, but are worth knowing
- Waiver of premium: keeps the policy in force without premiums if you become disabled, as defined in the rider.
- Accidental death benefit: pays an additional amount if death is caused by a covered accident.
- Child term rider: adds a small amount of coverage for children on the parent’s policy.
- Conversion privilege: lets you change term coverage to permanent coverage without new health questions before a deadline.
The bottom line
Living benefits give a life policy a second job: helping you while you are still here. Look at our Term Life Insurance and Critical Illness pages, then ask Viola or Jacob to walk you through the rider language on any policy you are considering, subject to underwriting. It is far easier to understand now than in a hospital waiting room.
Want to go through this with someone?
Viola Lucero and the Rise Up Benefits team in Chandler will go through your doctors, your prescriptions and your real numbers, and explain plainly what we found. We speak insurance, so you don't have to.
Sources
- AHCCCS Long-Term Care (ALTCS), Arizona Health Care Cost Containment System (AHCCCS)
Please note: Life, long-term care, annuity and supplemental products are subject to underwriting and carrier approval. Guarantees are based on the claims-paying ability of the issuing company. Nothing on this site is tax, legal or investment advice.