Why Your Life Insurance Should Cover More Than Just Death

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published 25 November 2024

Is your life insurance policy just a safety net for when you're gone, or does it offer real support when life gets unpredictable?

Life insurance has traditionally been viewed as protection for your family's financial future after you've passed. You think about the mortgage, your income, any debts. But what if life throws you a curveball while you're still here? What if you suddenly face a long-term disability or an unexpected illness?

Enter living benefits. More than a buzzword, these are crucial features that could redefine how we view life insurance. At its core, a life insurance policy with living benefits means accessing part of the policy's death benefit while you’re still alive, offering financial assistance during unforeseen challenges.

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What living benefits are available?

That depends on whether you buy term or permanent life insurance coverage.

Term insurance is less expensive, but it only provides coverage for a limited period of time. Permanent insurance includes whole, universal and variable life policies that are designed to provide coverage for the rest of your life. With all these policies, only a portion of the premiums you pay goes toward the cost of insurance. Much of the remainder is allowed to accumulate as what is called cash value.

With whole life policies, cash value grows at a guaranteed fixed rate over the life of the policy. In addition, whole life may offer dividends that are based on the profitability of the issuing insurance company.
With universal life policies, cash value grows at a rate that is typically tied to prevailing interest rates and may be used to pay part or all of a premium on occasion. Of course, you must be certain you have enough cash value in your account to sustain your policy.
With variable life policies, you have the ability to invest cash value in your choice of professionally managed, diversified portfolios of stocks, bonds and other securities. Depending on how your investment options perform, your cash value may grow more dramatically than it would with other forms of permanent coverage. However, it may also decrease in value if your investment options incur losses.

With all these policies, cash value is allowed to accumulate on a tax-deferred basis. What’s more, you gain two important living benefits:

You can access cash value, if you wish, through withdrawals or loans. Withdrawals are tax-free so long as they don’t exceed the amount of premiums you’ve paid into the policy. Loans are also income tax-free as long as the policy continues to remain in effect until the insured’s death. You should realize, however, that accessing cash value without replenishing it at some point may cause your policy to lapse or reduce its death benefit. What’s more, policy loans are subject to interest rate charges, albeit at a lower rate than loans offered by banks and other financial institutions.
If cash value grows sufficiently, you can use it to pay your insurance premiums. There are no tax consequences to using your cash value in this way. Compare this permanent life insurance benefit to term insurance which offers no cash value and imposes premiums that must be paid out-of-pocket each year.

Beyond cash value: What other living benefits are available?

Whether you choose permanent or term coverage, you may be able to add riders to your policy that offer such living benefits as:

Accelerated death benefit. People diagnosed with a terminal illness shouldn’t have to face additional challenges, but too often, the financial hardships that accompany these diagnoses are considerable. An accelerated death benefit rider will pay all or some of your policy’s death benefit while you are still alive. Granted, any payout you receive will reduce the death benefit available to your beneficiaries, but the ability to meet medical and other expenses during an unfathomably difficult stage of your life can help you and your family focus on more pressing priorities.

Critical illness benefit. Similar to an accelerated death benefit, this rider pays all or part of your policy’s death benefit if you are diagnosed with a serious but not necessarily terminal illness, such as a stroke or heart attack. Again, any payments you receive are deducted from your policy’s death benefit.

Disability rider. Also known as a waiver of premium rider, this living benefit enables you to forgo premium payments on your life insurance policy if you become disabled and unable to work. Depending on the terms of your rider, there might be a waiting period between the time you are diagnosed and the time you can stop paying premiums. Importantly, this rider does not impact your policy’s death benefit.

Two other important notes. First, most insurance carriers do not allow you to add these riders to existing coverage. They must be chosen when you purchase your life insurance policy or, in some cases, they are offered automatically. Second, including riders in your coverage will result in higher premium payments.

What about long-term care?

Long-term care insurance has changed dramatically in recent years. Policies that provide benefits to pay for nursing home, assisted living or other long-term care expenses are still available, but they do not pay a death benefit in the event you don’t require long-term care at some point in your life. What’s more, premiums can increase periodically, sometimes dramatically, and failure to pay them will lapse your policy.

To address these problematic issues, some insurance providers have created hybrid policies that combine long-term care with permanent life insurance. If you don’t require long-term care, your beneficiary receives a death benefit. If you do require long-term care, you will be able to access payments with no tax consequences. However, any payments you receive will reduce your policy’s death benefit accordingly. In addition, you can obtain this coverage without worrying about premiums increasing over time.

For many people who have purchased long-term care policies in the past, the idea of being able to provide loved ones with a death benefit is appealing, but does that mean you should get out of any long-term care policy you bought years ago in favor of a new one?

Not necessarily. Older policies tended to provide choices that newer ones don’t — for example, the amount of coverage, how long coverage will last, the length of the waiting period before coverage begins, whether coverage is adjusted for inflation, and so on. And many newer policies impose considerably higher premiums than they have in the past. Before you make a decision you might regret, talk with your financial advisory team, and get the guidance you need to determine your best options.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Stefan Greenberg is a Managing Partner who has been with Lenox Advisors since 2005. Stefan is responsible for working with both corporate and high-net-worth individual clients of the firm. He specializes in comprehensive financial planning, wealth management, estate planning and insurance services for individual clients. Additionally, he helps businesses attract, reward and retain top-level employees through the use of tax-efficient techniques.