Life insurance companies long ago determined their product was sometimes hard to sell to people who would never reap its main reward: a death benefit for the insured’s survivors after they pass away.
Over time, carriers made their policies more desirable by adding “living benefits.” These are features the policy owner may find useful while they are still alive; hence the term “living benefit.”
These benefits are so prevalent, it’s doubtful you’ll ever be sold an individual life insurance policy that doesn’t offer built-in and/or optional living benefits.
Here is an overview of the more common examples.
The living benefit life insurance companies market the most is cash value.
Unlike term life insurance, permanent life does not expire. You can maintain the coverage as long as you pay the required premiums.
With permanent life insurance, each premium payment covers fees and charges for providing the insurance. When payments are more than is required to cover those charges, the extra is moved into an account that earns interest. This is the cash value of a policy.
Cash value can be loaned to or withdrawn by policyholders. Life insurers often market this benefit as an extra savings account, college fund, or retirement fund.
Other than cash value, most life insurance living benefits are designed to provide coverage for serious health issues.
Many of these living benefits will provide you a portion of your death benefit if certain health circumstances occur.
Unlike cash value, these benefits are available on term life insurance as well as on permanent policies.
Examples of these benefits include:
- Disability Income Rider. This type of rider will pay a monthly benefit to an insured person who suffers a disability that affects their ability to work and earn an income.
- Waiver of Premium Rider. This rider enables the insured to keep their life insurance coverage intact without paying premiums if they suffer a disability that affects their ability to earn a living. Keep in mind this type of benefit does not provide income or benefit payments; it only waives your insurance premium obligation.
- Accelerated Benefit Rider. This feature lets you — or your beneficiaries — receive a portion of your contracted death benefit prior to your death if you are diagnosed with a terminal illness. This rider is sometimes referred to as a Terminal Illness Rider. You can use the rider benefit for medical care, hospice care, or other needs.
- Critical Illness Rider. This is similar to the Accelerated Benefit Rider. The difference is that the rider benefit is paid in the event you are diagnosed with a chronic illness, not a terminal illness. Insurers have different definitions for chronic illnesses, but they typically include strokes, heart attacks, and cancer.
- Long-Term Care Rider. This rider provides monthly payments if the insured becomes confined to a nursing home or other long-term care facility.
Learn More: 13 Key Life Insurance Riders to Know
Some living benefits add to the cost of life insurance for policy owners because they increase the cost for insurers to provide.
This is especially true for cash value life insurance. According to Investopedia, permanent policies cost on average between five and 15 times more than term coverage with the exact same death benefit. They also cited a 2016 study showing that, largely because of the high cost of coverage, roughly 25 percent of permanent life policies lapse within the first three years.
Some accelerated benefit features are included in your policy at no cost. Others charge an extra premium for the benefit. In some cases, you may get the benefit added to the policy for no charge but be charged a fee if you use the benefit.
Learn More: How Much Does Life Insurance Cost?
In addition to cost, another drawback of choosing permanent life over term life is the difficulty in getting out of your contract.
If you no longer want a term life insurance policy, you simply stop paying the premium. But if you don’t want whole life or universal life, you may have to pay a surrender charge to drop your coverage.
A surrender charge is a fee the insurance company imposes on the policyholder for canceling or altering the policy. It's designed to discourage you from canceling your contract or reducing your coverage.
Surrender charges are typically a percentage of the cash value. The percentage is higher in the early years of the policy and lower the longer you keep the policy. After a certain number of years, there isn’t a surrender charge involved with the contract.
If you spend any time researching life insurance living benefits, you will find experts who believe they have value for most applicants. You will find others who believe they are never worth the extra cost and you should always buy a simple no-frills term life policy to meet your needs.
Whether living benefits are worth the extra cost to you is an individual decision.
Many people simply can’t afford the monthly premium of permanent life insurance or tacking on several riders.
Keep in mind that even if a living benefit is “built-in” to a term policy at no cost, the overall cost of coverage may be higher than comparable term policies with no living benefits. Therefore you need to compare more than just cost when considering different term policies.
As far as cash value goes, there are a few advantages to these policies. One is that the cash value can typically be accessed on a tax-free basis. Second, most life insurance policies insulate cash value from market fluctuations, meaning you don’t have to worry about losing the cash value when the market crashes.
There are also disadvantages to using some of these benefits. For example, withdrawing cash value reduces the death benefit of your policy. Take out too much of the policy’s cash value without paying it back and you can inadvertently lapse the policy, meaning you no longer have life insurance.
An accelerated benefit rider also reduces the death benefit you’ll leave for your beneficiaries. Therefore, if you prefer leaving the full death benefit and not using it for end-of-life care, you may want to pass on this living benefit.
Some living benefits are not adequate substitutes for other coverage options. For example, a disability rider added to your life insurance policy can provide a little extra coverage for a little added cost. On the other hand, you shouldn’t consider a disability rider as a complete replacement for a separate individual long-term disability policy. Life insurance disability riders are not designed to provide the comprehensive coverage that a standalone disability policy can provide.
All living benefits have options not tied to life insurance. Many experts believe that cash value is not an adequate savings vehicle because of the cost involved and its slow accumulation. Instead, you should consider retirement accounts for your retirement savings, 529 plans for your college savings, and other methods for saving money.
If you’re interested in what is provided by cash value or other living benefits, you may want to do a thorough analysis of the cost and benefits of buying individual policies and investment vehicles to see which option is worth your money.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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