William Blesch If you’re like most people, you probably think of your life insurance policy as a way to protect your beneficiaries in the event of an early passing. But what if you could use your life insurance as a safety net against unexpected disability and medical expenses?
That’s where a living benefits rider comes in. A living benefits rider can help protect you in case of a severe illness or injury by allowing you to acquire a portion of your life insurance policy while still alive.
In this article, we will go over the value of adding a living benefits rider to your life insurance policy to better understand whether it’s worth the price tag before signing up.
What is a living benefits rider?
A living benefits rider is an additional feature that you can add to a life insurance policy. Sometimes it’s also called a living needs benefit rider or an accelerated death benefits rider.
It allows policyholders to access a portion of their death benefit while still alive if they become terminally ill or need long-term care.
There are two primary types of living benefits riders:
- Terminal illness riders allow policyholders to receive a portion of their death benefit if they receive a diagnosis of a terminal illness and have a year or less life expectancy.
- Long-term care riders provide benefits if the policyholder becomes disabled and needs help with daily activities such as bathing, dressing, and eating.
In essence, if you find yourself in a situation where you cannot work due to a serious injury or illness, a living benefits life insurance rider can provide much-needed financial assistance.
Under certain circumstances, benefits may be unrestricted. This means that you could potentially use a living benefits life insurance rider to fund the construction of home modifications, such as a wheelchair ramp or other medical home care needs.
Don’t forget to check with your insurance company to see if there are any restrictions on using your benefits — like needing a letter from your doctor — and what proof you’ll need to make a claim.
Specific Categories of Living Benefits Riders
As already indicated, there are two primary types of living benefits riders. Still, you can put these into three main categories since many companies loosely throw the term “living benefits riders” around. In many cases, it simply means any benefit you receive before passing.
Here are those categories:
- Chronic illness. Some insurers may permit you to gather funds from your death benefit to help pay for assistance needed after a severe illness or disability diagnosis.
- Critical illness. If you receive a diagnosis with an acute condition like a stroke, sudden cardiac arrest, cancer, or paralysis, this type of rider will permit you to access death benefits.
- Terminal illness. This rider provides an early payout of death benefits if you’ve been given 6 to 24 months to live (depending on which insurance company you choose).
As you can see, the term is used quite loosely and doesn’t have a universal definition. Should you decide that you want to add to your existing life insurance policy or buy a new one, ensure that you know precisely what’s meant when speaking about a living benefits rider.
Who can use a living benefits rider?
Living benefits riders are available on both term and permanent life insurance policies. You can add them when purchasing your life insurance policy, but you can typically access them only when you’ve experienced a dire change in health.
For example, many insurance companies require that an illness or injury result in your life expectancy dropping to between six months and two years before they’ll allow you to access the benefits provided by a living benefits life insurance rider.
Remember that no matter what your reason is for wanting to collect on accelerated death benefits, make sure you are prepared before trying to do so. This includes gathering all the necessary proof and information required by your insurance company. Recall that every insurer is different, so make sure you know what you need to provide them to get the payout you deserve.
If you are in good health and do not foresee any dramatic changes, a living benefits rider may not be necessary.
How much money can be advanced?
Typically, you will receive between 24 and 100 percent of the life insurance policy’s total death benefit.
So, if you have a $100,000 death benefit policy and are approved for an accelerated death benefit payout, you may receive between $24,000 and $100,000.
Keep in mind that it’s best to check with your insurer to get specific information about how much money can be advanced. Additionally, not all insurers offer accelerated death benefits payments, or if they do, they may have a dollar limit.
Therefore, you need to understand how the dollar limit works with your payout. You may reach that limit before you reach your maximum percentage.
Additionally, if your policy pays out less than 100% of the death benefit, the insurer will provide the remainder to your beneficiaries after you die. For instance, if your living benefits rider permits you to take out 50% in advance, your heirs will receive the remainder upon your passing.
Remember, this benefit can only be used one time. The insurer will terminate this particular rider once you’ve used the living benefit.
Is a living benefits rider taxable?
Tax implications are an essential consideration when making any decision about your finances. Living benefits riders can be a great way to provide extra security for you and your loved ones, but it’s crucial to do your homework first and understand how the tax laws will affect you.
If you change the reasons why your insurance company pays out on a policy, it could trigger some taxes. However, the federal government ruled that the proceeds of an accelerated death benefit are not taxable. Thus, you won’t have to pay federal taxes on a living benefits rider. This has been the case since 1997.
However, the same is not true for state taxes. Depending on the state you live in, your living benefits rider may be subject to taxation. Always check with your insurance agent and a tax advisor to understand the full financial implications.
Are there any fees involved with living benefits riders?
Some companies levy fees for adding riders, and others don’t. Many include living benefits riders on all policies without charging anything extra. Others see it as providing you with additional services you need to pay for.
If the insurance company does charge to add the rider, it may be a one-time fee. Annual fees are also standard, and these may be charged each year the rider is in effect.
Additionally, there may be charges involved if you use the rider early. These fees are often a flat administrative fee or a percentage of the payout amount.
The point of the story here is that you should ensure that you understand all fees involved in your life insurance policy and any additions you wish to make. This includes both one-time and annual fees.
By asking all the necessary questions and receiving clear answers in writing, you can avoid any unpleasant surprises down the road.
The Bottom Line
Adding a living benefits rider to your life insurance policy is a smart move.
First, it can provide you with peace of mind knowing that you have some financial security if you happen to be diagnosed with a critical illness. Second, it can help you cover the costs of your medical care without draining your savings.
With that said, be sure to always consult with your tax advisor to ascertain whether there are state tax obligations you’ll need to take into account if you choose to add this rider to your life insurance policy.
