Is Life Insurance Only for When You Die? Living Benefits

Most people think of life insurance as something that pays out after someone passes away. That is its main purpose, and for many policies it is the only thing it does. But it is not always the whole story.

Some policies include features that may be useful while you are still alive. They are not the same on every policy, and they come with conditions. This page explains what they are in plain words so you can ask good questions.

Living benefits are riders, which are optional add-ons to a policy. They vary by policy and carrier, so what one company offers may look different from another.

In general, a living benefit rider may let you access part of the death benefit early if you have a qualifying illness or are unable to do a certain number of daily self-care tasks. One example is being unable to do 2 of 6 activities of daily living, which are basic tasks such as bathing or dressing. The exact definitions differ from one rider to the next.

The idea is to give you some financial help during a serious health event, rather than only after it. It is a feature that may help in specific situations, not a replacement for planning.

It is important to be clear about the limits. Payouts reduce the death benefit, so whatever you take early is no longer available to your beneficiary later. Qualification has conditions, such as a diagnosis of a covered condition, and a company may require medical documentation.

Some riders add to the cost of a policy, while others may be built in. Ask which applies to the policy you are considering, and ask exactly what the rider covers and what it does not.

A living benefit is not a promise that you will receive money. It is a feature that applies only if you meet the definitions in the policy.

Some permanent policies also build cash value over time. This is a portion of the policy that may grow, depending on how the policy is designed, and you may be able to borrow against it.

There are limits and risks. A loan generally accrues interest, an unpaid loan can reduce the death benefit, and borrowing too much can cause the policy to lapse, which means the coverage ends. How much cash value builds, and how quickly, varies by policy and carrier.

Term policies generally do not build cash value. That is one of the differences between term and permanent insurance.

It bears repeating that not every policy includes living benefits or cash value. Some do, some offer them as options, and some do not offer them at all. Do not assume a policy has them unless it says so in writing.

Tax rules for living benefit payments and policy loans can be complicated, so talk to a tax professional before you rely on them. Death benefits are generally not subject to income tax for the beneficiary, but it is still wise to check with a tax professional about your situation.

A few questions can keep you on solid ground. Does this policy include living benefits, and are they built in or an added rider? What are the conditions to qualify, and how do payouts affect the death benefit? What does it cost?

If cash value is part of the policy, ask how loans work, what limits apply, and what could cause the policy to lapse. Make sure the answers are in the policy documents, not just in conversation.

A clear explanation is part of buying insurance well. If something is confusing, ask again.