In relation to life insurance, everyone knows what a “death benefit” is. It is the obvious reason that most consumers buy it. If (when) they die, a beneficiary collects the face amount of the policy. Pretty basic stuff.
In recent years some attention has been given by carriers to provide benefits that an insured could take without the inconvenience of being dead. Some refer to it as life insurance you don’t have to die to use. In the industry we refer to these as “Living Benefits” for obvious reasons.
What are Living Benefits? They are specific coverage categories that trigger an option on the behalf of the insured to take some portion of the face amount of a life insurance policy. The amount of the advance against the policy will vary based on the severity of the ailment, i.e., its impact on life expectancy, and specific carrier criteria. Let’s examine the types of events that trigger these Living Benefits.
What Types Of Living Benefits Are Available?
- Terminal Illness – This is the original triggering event and chances are if you have a life insurance plan purchased recently, it is already included. This benefit was precipitated by the industry to combat lapse in coverage due to “viatical settlements”. Essentially a broker would purchase the plan for cash at a discount when the insured was in a disadvantaged condition. These settlements still exist, however in cases where the insured is medically diagnosed with a life expectancy anywhere from 12 – 24 months, most carriers with allow an advance of up to 95% of the face amount.
If the life expectancy is greater than 24 months, then a portion of the plan may still be captured where the plan includes other living benefits. A structured settlement would still be available although there are many regulatory hurdles beyond the scope of most insurance agents. Here are some other triggering events.
- Critical Illness – This is possibly the most potentially useful situation. Taking the example of a 55 year old who would still qualify for a 30 year term with certain companies, the likelihood of a serious illness is pretty high. Even a mild event can trigger some option to exercise an advance. Critical illnesses may include but are not limited to:
- Cancer
- Heart Attack
- Stroke
- Coma
- Severe burns
- Chronic Illness – This is a rider that covers loss of functional capacity and may be physical or cognitive ability related. It may be as a result of illness or injury and requires certification by a licensed medical professional. Generally these riders pay out similarly to disability benefits i.e., by the month.
- Long Term Care – Also referred to as an extended care rider, this option serves to accelerate benefits for similar condition that would trigger a chronic illness rider. Benefit levels vary widely and the benefit may or may not be tax free. Usually as with the Chronic Illness rider (some would suggest these are one and the same), the funds may be used for any purpose although there are exceptions. Also it would be important in considering this or the Chronic Illness rider to determine if the payout is an indemnity (fixed) or a reimbursement (cost based).
Frequently asked Questions
- How much more does this cost? Terminal Illness is generally included in most policies. For other conditions, the cost is incremental for those who are healthy. In general it is less expensive than purchasing separate plans to assure coverage and especially the better stand alone critical illness (CI) and disability income (DI) coverage types end as early as age 60. Also the riders tend to be more lenient in underwriting (although not a lot) than stand alone plans in our opinion.
- Can I add the riders later? Not usually. First the carrier has to offer them and although most do there is no universality. Most life insurance plans offer what is called “conversion rights” which are the rights to change from the current plan to another with the same company without going through underwriting. Also, where the company may offer coverage with these options it may not be a conversion option. Check with your insurer or call us. We know the options inside out.
- If I exercise say a Critical Illness rider what happens? The insurer in most cases will look at the diagnosis which must be by a licensed medical professional (generally an MD specialist). Based on the severity they will allow in most plans a percentage of the death benefit (DB) up to a limit. If you decide to take a benefit, you are not required to take the entirety. It is paid out in a lump sum.
Here is an example: The face amount is $500,000. There is a diagnosis of heart attack and the accelerated benefit is 30%. The insured takes 20% or $100,000. With many plans but not all, the death benefit is reduced to $400,000 and the monthly premium is reduced accordingly. It is important to note that these distributions are subject to income tax, so especially in the case of a terminal illness, it is advisable to take advances only to cover needs considering the balance is tax free to the beneficiary soon enough.
- If I exercise a Chronic Illness or Long Term Care (Extended Care) rider what happens? This is different in many ways. For one the proceeds are generally not subject to income tax under (101g). That is a good thing. Some plans as mentioned previously, pay out on a reimbursement basis attached to actual costs. The ones that do not fit that category pay out on a fixed monthly rate in dollars or a percentage of the DB. The DB is reduced similarly and if there is cash value in the plan it may also be affected.
Find your niche. Insurance companies have preferences.
Whether you are a bellwether of good health, or have strong concerns regarding your health history, it is of great importance to apply with the insurer most likely to issue your policy and at the lowest rate. Contrary to popular belief, for those who have health concerns the “shotgun” approach to applying by submitting to numerous companies simply does not work.
The reasoning behind this is that companies and the underwriting staff are all in know and the records that are used (MIB medical, DMV, Credit) are universal sources that all companies rely on. Paramed exam results are usually valid for six months. Knowing where to place the application is the single most important part of the process. That means being objective and candid about your health and working with a knowledgeable independent agent.
Especially in high risk (Substandard) cases, assembling and presenting an effective argument to an underwriter, much like an attorney is key to the most positive outcome for you. Having an effective advocate to guide you at no risk or cost to you is what we do.