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Life Insurance Coverage and Living Benefits: What You Need to Know

Life insurance is a crucial part of your financial plan. It can help you provide for your family after you die —and even during your lifetime.

[content_band bg_color=”#e8f4f8″ border=”all”] [container] [custom_headline style=”margin: 0; 0; 0; 0;” type=”center” level=”h4″ looks_like=”h4″ accent=”true”]Key Takeaways[/custom_headline]

  • A life insurance policy can help you cover expenses and make up for lost income if you die or become incapacitated.
  • Term life insurance offers a death benefit if you die during the policy’s active period. Permanent life insurance has no expiration date and typically also has a cash value from which you can borrow.
  • Living benefits allow you to access your life insurance policy’s cash value if you become critically ill or injured.[/container] [/content_band]

What Is Life Insurance? 

Life insurance helps you provide for the people who depend on you. You pay a premium for a life insurance policy, which pays a death benefit to your loved ones after you die.  The death benefit can help your family in several ways:

  • Helping to cover your final expenses, including funeral costs, estate administration expenses, and estate taxes
  • Protecting your family against loss of income should you die prematurely
  • Providing your descendants with an inheritance

Many life insurance policies have set expiration dates, but permanent policies are different.

Permanent Life Insurance

A permanent life insurance policy provides you with a death benefit no matter when you die, assuming that you keep paying premiums. This differs from a term life insurance policy, which has an expiration date. A permanent policy may also offer additional benefits, such as:

  • Accumulated interest at market rates
  • Opportunities to adjust your premiums
  • Available cash withdrawals during your lifetime

With certain additions, permanent life policies can also help cover the expense of your care if you become disabled.

Who Needs Life Insurance?

Most people have someone who would suffer financially after their death. We most commonly think of families with dependent children.  However, there are other people who should have life insurance, including:

  • Married couples without children
  • People who support disabled or elderly relatives
  • Those hoping to leave an inheritance to younger relatives or friends
  • People planning for retirement

What Type of Life Insurance Should You Have?

There are three basic categories of life insurance: term, whole, and universal. Whole and universal life fall under the umbrella of permanent life insurance.

Term Insurance

A term life insurance policy guarantees you coverage for a set duration, usually one to 30 years, or until you reach a particular age with an annual premium renewal. Most companies give you the option to renew, but premiums may be higher for the renewed policy.

Many people find that when they buy term insurance instead of permanent life insurance, they initially pay significantly less premium for the same face amount and can often secure a higher death benefit and still fit their budget.

Whole Life

This type of permanent life insurance policy offers death benefits and premiums that remain stable throughout your lifetime.

A whole life policy also allows you as a policyholder to build tax-deferred cash savings. After a certain period, you have the option to borrow from that accrued cash value. The amount you borrow comes out of your death benefit, but you have the option to repay it with interest.

You can also use the cash value of your policy to stop paying premiums for as long as the account holds value. If the money runs out—or if you want to restore your cash value—you can resume premium payments.

Universal Life 

Universal life is another form of permanent life insurance. Like whole life insurance, universal life builds cash value that you can borrow against. This loan may be tax-free in some cases.

A universal life policy does offer flexible premiums, which will help your changing needs and budget. The flexibility exists because a universal life policy invests your assets in slightly riskier products.

Adding Value with Living Benefits

You can add other benefits to your life insurance policy through add-ons called riders. One popular type of rider provides living benefits, meaning that you can use your policy’s death benefit if you experience a qualifying medical event.

What Is a Qualifying Event?

Events that qualify for living benefits are typically those that shorten your life or impact your ability to care for yourself and your loved ones.

Terminal Illness

Living benefits riders typically define a terminal illness as one that would result in death within 24 months. The insurer usually requires certification of the illness from a physician.

Chronic Illness

Living benefits can also help with expenses or lost income due to an illness that impacts at least two activities of daily living, such as bathing, dressing, or toileting. The rider may specify that, to receive benefits, you must be one of the following:

  • Generally cognitively impaired
  • Unable to perform at least two activities of daily living (bathing, toileting, etc.) without assistance

In general, a condition that requires you to live in a nursing home or other institution would likely qualify for living benefits.

Critical Illness

Critical illnesses are those that would dramatically impact a person’s lifespan without extensive medical intervention. Example conditions include but are not limited to:

  • Coronary artery disease
  • End-stage renal failure
  • Cancer
  • Major organ transplant

An insurance commissioner may determine what qualifies as a critical illness.

Critical Injury

Eligible injuries are those that cause significant impairment or loss of income. Examples include:

  • Coma
  • Paralysis
  • Traumatic brain injury
  • Severe burns
Uses of Living Benefits

In most cases, you can use living benefits to cover any expenses related to your qualifying illness or injury. Such expenses may include:

  • Household expenses (utilities, cleaning services, child care, etc.)
  • Home modifications (wheelchair ramps, stairlifts)
  • Long-term care (nursing homes, assisted living)
  • Adult daycare
  • Regular bills

Quality-of-life expenses (in-home nursing or personal support, occupational therapy)

To be safe, check the regulations in your state before you make plans. In Massachusetts, for example, you can only use living benefits for long-term care.

Protection for the Unexpected

When your family depends on your income, your early death or an incapacitating illness could significantly change their standard of living. Life insurance provides financial security when you cannot. And right now, in the middle of a pandemic, be prepared to expect the unexpected. For information on how to navigate life insurance during a pandemic, click here.

Certain life insurance products can also help provide financial security during your lifetime. A permanent policy with a cash value account can give you another income stream and potentially help you to achieve your retirement goals. Living benefits give you even more options by enabling you to access your death benefit if you experience a qualifying medical event.