A living benefit is a feature of a temporary or permanent life insurance policy that can be used by the policyowner and/or the insured while they are living. Living benefits can also provide funds to a loved one upon the insured’s death. In general, living benefits of temporary life insurance benefit the insured while living benefits of permanent life insurance benefit the policyowner.
Living benefits of temporary life insurance include illness protection. Illness protection is provided by an accelerated benefits rider, also known as a living benefits rider. A portion of the death benefit is paid early to fund illness-related expenses of the insured. After the insured’s death, any remaining death benefit not already paid out to the insured will be paid to the designated beneficiary.
Illness protection covers three forms of illness: terminal, chronic, and critical. Within these three forms of illness, the early payout of the death benefit covers medical expenses and professional medical care until the death of the insured.
Living benefits of permanent life insurance include: cash value, dividends, policy loans, and tax advantages. State-applicable life insurance policies may allow a long-term care rider to be added to an insurance policy that effectively creates a hybrid life insurance policy. This is due to long-term care insurance normally being sold separately.
Cash value offers guaranteed annual tax-deferred growth. Dividends are a return of profit by a mutual insurance company to its policyowners, and are paid annually, although not guaranteed. Policy loans are collateralized by the death benefit of the insurance policy and allow the cash value to be used as a form of supplemental income. Tax advantages include tax-deferred growth of cash value, tax-free withdrawals of cash value, and a tax-exempt payout of the death benefit to a designated beneficiary.
A long-term care riders protects the insured and covers the activities of daily living (ADLs), and if one or more cannot be performed by an insured, a separate source of funds are provided by the life insurance company to pay for the daily assistance of those activities by a medical professional.