Life insurance is typically thought of as a financial safety net for loved ones in the event of the policyholder’s untimely death. However, many people need to made aware that life insurance policies can also offer living benefits that provide important support in times of need. These living benefits can include accelerated death benefits, which provide a portion of the policy’s death benefit to the policyholder if diagnosed with a terminal illness, and cash value, which allows the policyholder to access funds that can be used for a variety of purposes.
In this article, we will explore the living benefits of life insurance and the ways in which they can offer valuable protection for policyholders and their families.
What is Life Insurance?
Life insurance is a contract between an individual and an insurance company, where the insurer promises to pay a specified amount of money to the individual’s beneficiaries upon their death. In exchange for this promise, the individual typically pays premiums to the insurer on a regular basis, either monthly or annually. Life insurance is designed to provide financial protection for loved ones in the event of the policyholder’s death.
The beneficiaries can use the proceeds from the policy to cover expenses such as funeral costs, mortgage payments, and other bills. Some life insurance policies also offer living benefits, which allow policyholders to access funds while they are still alive, such as in the case of a terminal illness.
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Living Benefits of Life Insurance
The policyholder can access the living benefits of life insurance while they are still alive. These benefits can vary depending on the type of policy, but some common examples include the following:
Cash value: Some life insurance policies, such as whole life and universal life insurance, build cash value over time. This cash value can borrow against or withdrawn by the policyholder for any purpose, such as paying off debt or funding a child’s education.
Accelerated death benefits: Some life insurance policies may offer an accelerated death benefit if the policyholder is diagnosed with a terminal illness. This allows the policyholder to access a portion of the death benefit while alive to cover medical expenses and other costs associated with their illness.
Long-term care benefits: Some life insurance policies offer long-term care benefits, which can help pay for long-term care services, such as nursing home care or in-home care.
Disability waiver of premium: If the policyholder becomes disabled and is unable to work, some life insurance policies may waive their premium payments so that the policy remains in force.
Overall, the living benefits of life insurance can provide valuable protection and financial support for policyholders and their families during their lifetime, not just after their death.
Living Benefits for Term Life Insurance Policies
Term life insurance policies typically do not build cash value, but some policies may offer living benefits that can access during the policy term. Here are some examples of living benefits that may be available for term life insurance policies:
Critical Illness Benefit: Some term life insurance policies offer a critical illness benefit, which pays a lump sum if the policyholder is diagnosed with a critical illness such as cancer, heart attack, or stroke. The policyholder can use this benefit to cover medical expenses, pay off debt, or make up for lost income.
Conversion Option: Some term life insurance policies include a conversion option, which allows the policyholder to convert their policy to a permanent life insurance policy without undergoing a medical exam or answering health questions. This can be a valuable benefit if the policyholder’s health has declined since they purchased the term policy.
Overall, while term life insurance policies do not offer the same living benefits as permanent life insurance policies, they may still include some options that can provide valuable protection and financial support for policyholders during their lifetime.
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Living Benefits for Permanent Life Insurance Policies
Permanent life insurance policies typically offer more living benefits than term life insurance policies because they have a cash value component. Here are some examples of living benefits that may be available for permanent life insurance policies:
Cash Value Withdrawals: Permanent life insurance policies, such as whole life and universal life insurance, build cash value over time. Policyholders can access this cash value through withdrawals or loans, which can use for any purpose, such as paying off debt, funding retirement, or covering unexpected expenses.
Policy Loans: If the policyholder needs access to cash, they can take out a policy loan using the cash value as collateral. The policyholder can use the loan proceeds for any purpose and repay the loan over time, with interest.
Overall, the living benefits of permanent life insurance policies can provide valuable protection and financial support for policyholders and their families during their lifetime, not just after their death.
How do I access the living benefits of my life insurance policy?
The process for accessing the living benefits of your life insurance policy will vary depending on the type of benefit and the specific policy you have. Typically, you need to contact your insurance company or agent to request the benefit and provide any necessary documentation or information.
For example, if you wanted to access the cash value of your permanent life insurance policy, you would need to submit a request to your insurance company or agent. The insurance company may require you to fill out a form, provide identification, and sign paperwork to authorize the withdrawal or loan of cash value.
If you wanted to access an accelerated death or critical illness benefit, you would typically need to provide proof of diagnosis or other documentation to the insurance company to verify your eligibility. The insurance company may also require you to fill out forms or provide additional information to process the benefit.
It’s important to keep in mind that accessing living benefits can have an impact on your life insurance policy, such as reducing the death benefit or affecting the policy’s cash value growth. Be sure to review your policy and understand the potential implications before accessing any living benefits.
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Do I have to pay taxes on the living benefits of my life insurance policy?
The tax implications of living benefits depend on the specific benefit and the policy. In general, cash value withdrawals and policy loans are not subject to income tax as long as the policy remains in force. This is because the withdrawn money returns the policyholder’s premiums rather than income.
However, accelerated death and critical illness benefits may be taxable under certain circumstances. For example, if the policyholder is receiving benefits due to a terminal illness, the benefits may exclude from income tax. However, if the policyholder is receiving benefits due to a non-terminal illness, the benefits may be subject to income tax.
It’s important to consult with a tax professional to fully understand the tax implications of accessing living benefits from your life insurance policy. They can provide guidance on how to minimize taxes and ensure you are fully informed about any potential tax consequences.
Conclusion
In conclusion, life insurance is not just a tool to provide financial security for loved ones after death. It also offers living benefits that can provide financial assistance during times of need. The living benefits of life insurance include the following:
- Cash value accumulation.
- Access to funds in emergencies.
- Protection against long-term care expenses.
With these benefits, life insurance can provide a sense of security and peace of mind, not just for the future but also for the present. It’s important to discuss these benefits with a financial advisor to determine the best life insurance policy for your specific needs and situation.
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FAQs
Q: Can I access the cash value of my life insurance policy during my lifetime?
A: Many life insurance policies offer cash value accumulation, which can access through withdrawals or loans. These funds can use for emergencies or other financial needs.
Q: What happens to my life insurance policy if I need long-term care?
A: Some life insurance policies offer riders that provide coverage for long-term care expenses. This can help protect your retirement savings and assets from the high costs of long-term care.
Q: Can I change the amount of coverage or premiums on my life insurance policy?
A: Yes, many life insurance policies offer flexible options to adjust the amount of coverage or premiums. However, it’s important to discuss any changes with a financial advisor to ensure they align with your overall financial plan.
Q: How is the cash value of my life insurance policy taxed?
A: The tax treatment of cash value in life insurance policies can vary depending on the type of policy and how the funds are access. It’s important to discuss the tax implications with a financial advisor or tax professional.
Q: Are living benefits only available for certain life insurance policies?
A: No, living benefits are available for many types of life insurance policies, including term life, whole life, and universal life. It’s important to discuss the living benefits and options available for each policy with a financial advisor.