Every field has its jargon—from an accountant’s asset (“something that is owned”) to a zoologist’s histology (“study of cells”).
No doubt your profession or hobby has its unique terms, too.
Life insurance has lots of special terms, but three of the most important are easy to grasp, once they’re explained to you. Try these:
- Death Benefit
- Living Benefits
- Premium is the periodic sum of money that must be paid to keep a life insurance policy in force. Depending on the policy, the premium can be paid as a one-time lump sum, annually, quarterly, or monthly. Your great grandparents probably knew about debit agents—life insurance agents who would drop by the old homestead weekly to collect the premium. Wow! Weekly!
- Death Benefit is the amount your loved ones (or others you designate) will receive from the insurance company upon your death. Some people think of life insurance only in terms of its death benefit. After you finish this article, you’ll know more than they do!
- Living Benefits—now that’s an interesting one. Living benefits are life insurance benefits that allow the policy owner to access cash while still living. And living benefits are the subject of this article.
Think about this: Accident insurance pays a benefit in case of an accident, right? And disability insurance pays if there’s a disability. Fire insurance pays when there’s a fire, and earthquake insurance covers you if there’s an earthquake.
So doesn’t it make sense that life insurance pays something during your life? It can—unless you purchased the most basic no-frills term insurance.
Yes, life insurance can offer death benefits and living benefits. Living benefits are offered before you die, and death benefits are offered … well, you get the picture.
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Living Benefits Available on Some Term Life Insurance Policies
Living benefits are most often associated with permanent (cash value) life insurance. But even term life insurance policies can be purchased with one or more riders, which will pay you money while you’re still alive—under circumstances you, frankly, hope you never find yourself in. Hint: Those circumstances all have to do with illness:
- You’re terminally ill. You can receive a portion of your death benefit in advance, for help with medical expenses, one final around-the-world fling, or whatever.
- You’re chronically ill. Frequently you’re considered chronically ill if you can’t perform several of the six activities of daily living, such as getting out of bed, feeding yourself, bathing, and so forth. You can receive a portion of your death benefit in advance, in situations like this.
- You’re critically ill. That could mean you’ve been diagnosed with a heart attack, stroke, cancer, end stage renal failure, major organ transplant, or some other pretty grim illness. Again, you can get some or all of your death benefit early—in time to be of some use to you.
The living benefits offered by term insurance policies have to do with illness. And they all have something else in common. Did you notice what it is?
These are accelerated benefit riders. They only affect when the insurance company pays the money. They don’t affect how much is paid.
That means, for example, that if you have a $100,000 death benefit, and you receive $75,000 prior to your death because you qualified under one of these riders, when you actually do pass away, the insurance company will pay only the remaining $25,000. They’ve already paid $75,000; they won’t pay that again.
Now, let’s go beyond term life insurance, to see what living benefits are available on the other broad type of life insurance, permanent life insurance.
Living Benefits Available on Many Permanent Life Insurance Policies
First the good news: the same types of accelerated benefit living benefits available for most term life insurance policies are also available for most permanent life insurance policies.
Now for the even better news: Most permanent life insurance policies offer living benefits that go far beyond what’s available with term insurance. In many cases, these benefits do not subtract from the death benefit, as accelerated benefits do. They’re in addition to whatever death benefit is paid upon your passing.
Permanent life insurance policies can do this because they build equity, called “cash value,” that accumulates over time. This accumulation of cash value, along with tax advantages available with a permanent life insurance policy, allows you to enjoy “living benefits,” including:
- Guaranteed, tax-deferred growth. With a permanent life insurance policy of the whole life variety, your cash value is guaranteed to grow and to never decline in value. It contributes to your financial security with stable yet consistent growth that supports your financial goals.
- Collateral for policy loans. The cash value you accumulate is an asset on your balance sheet. You may borrow money against your policy, using the cash value and death benefit as collateral, at any time and for any reason. Some examples of reasons Bank On Yourself policy owners have borrowed money (Note: you’re not required to explain why you want the loan, but owners like to brag to us!) include:
- Purchase a home
- Invest in a business or commercial property
- Handle a financial emergency
- Provide a steady stream of supplemental income in retirement
- Dividend payments. Though they are not guaranteed, the insurance companies recommended by Bank On Yourself Authorized Advisors have paid dividends every single year for well over a century. You can choose to take the dividends in cash, use them to pay back a policy loan, or use them to purchase additional insurance (known as paid-up additions) that increases the death benefit and cash value of the policy. Like other cash value, reinvested dividends grow tax-deferred.
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- Flexible funds for retirement. You can use your permanent life insurance cash value to supplement your retirement income without the requirements and limitations that apply to 401(k) and IRA retirement accounts. You have several choices, including receiving your dividends in cash, surrendering paid-up additions that you purchased along the way, or taking a policy loan (all of which may have tax consequences or affect the death benefit).
- College savings. Life insurance cash value is one of the few assets not considered in federal college financial aid calculations. Families with college-age children who have permanent life insurance policies not only can use the policy’s cash value (via policy loans) to pay college tuition and housing expenses, but also might benefit from greater financial aid opportunities, compared with families with a similarly-sized 529 Plan.
- Legacy opportunities. There are many opportunities to leave a legacy through life insurance in addition to providing for your spouse, family and other heirs. If you have a favorite charity or local cause, you can fund a legacy gift with a life insurance policy, naming the organization as beneficiary.
- Long-term care. Some states allow insurance companies to offer hybrid policies that include a long term care benefit, along with the regular death benefit.
- Tax benefits. Permanent life insurance offers many tax advantages, including tax-deferred growth on cash value accumulation, tax-favored access to cash value up to the life insurance policy’s basis, and income tax-free distribution of death benefits.
The living benefits of life insurance are not to be sneezed at. While not everyone will have a need for an accelerated benefit rider, fortunately, those insured individuals who suffer terminal, chronic, or critical illnesses will bless the day they purchased life insurance with those riders.
And when you take a look at the other living benefits—offered to owners of permanent life insurance policies—you’ll see the doors to savvy financial planning really begin to open wide.
Find out for yourself about all the living benefits available as part of a Bank On Yourself-type dividend-paying whole life insurance policy. Request a no-nonsense, no-obligation, no-cost consultation with a Bank On Yourself Authorized Advisor today.