While most people will typically purchase life insurance coverage in order to provide death benefit proceeds for loved ones – or for some other entity of choice, over the past several years, life insurance policies have come up with some alternate concepts in how insureds are able to utilize the policies’ funds while they are still alive. These are commonly referred to as the policy’s “living benefits.”
Now, no longer are life insurance policies only being utilized only when one passes away. Today, policy benefits can actually be more “customized” for other needs as well – and this is helping consumers to use their plans for a number of unique needs and goals.
Living benefits, also referred to as accelerated death benefits, can be added as a rider to life insurance policies either at the time of purchase or afterwards. These benefits will allow terminally ill individuals to access a portion of their life insurance death benefit proceeds prior to their death.
Today, with the rising cost of health care, many individuals are faced with financial hardship during an already difficult time in their lives. As one deals with both physical and emotional difficulty, the financial help that funds from a policy’s living benefits can provide can be a welcome relief. These funds can not only relieve the stress on the individual, but also on loved ones as well.
The benefits from the policy can typically be accessed through either a policy surrender or a policy loan. In essence, living benefits act as a type of lien against the life insurance policy. They will reduce the death benefit that is payable to beneficiaries, and can also reduce the amount that is available for loans as well as the cash value of the policy. The lien equals the amount of the living benefits payment that the policy holder receives, plus accrued interest. If you’re wondering how much a one million dollar life insurance policy costs or you’re interested in HSBC term life insurance we can answer that question and many more!
How a Policy Holder Can Access the Living Benefits from a Life Insurance Policy
The proceeds from a living benefit are deducted from the insurance policy’s face value. These funds may be received by the policy holder as a lump sum or in installment payments. Oftentimes these proceeds may be used to pay medical bills, nursing home expenditures, or even to pay off other bills or to take a vacation.
Living benefits usually pay out between 50 and 80 percent of the insurance policy’s death benefit amount – although some insurance companies may pay out as much as 100 percent of the life insurance policy’s death benefit amount.
It is important to note that when a policy holder receives living benefits, they are still responsible for continuing to pay the premiums that are due on the life insurance policy. These premiums will essentially continue to keep the remainder of the policy in force.
In addition, the insurance company will charge the policy holder interest on what they receive from a living benefit. And, the death benefit amount received by the policy holder’s beneficiaries will be reduced by the amount of the living benefit that has been received.
A policy holder can access their living benefits when:
- They have a terminal illness and their death is likely to occur within a certain amount of time – typically within twelve months. (Although in some cases a policy holder does not need to be classified as terminally ill, but rather they must meet other specific medical conditions).
- They will be permanently confined to a nursing home
- They are unable to perform certain activities of daily living on their own
- They have a certain type of catastrophic illness or a need for specific medical care such as an organ transplant or a need for continuous life support services
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How the Living Benefits from Life Insurance Policies Are Taxed
The income that is received from a living benefit will not be subject to federal income taxes as long as it meets certain criteria. In order to qualify for a tax free exemption on living benefits, the policy holder must be classified as being “terminally ill” when he or she files their income taxes. In most states, living benefits are not subject to state income tax.
It is important to note, though, that in some cases the individual may be taxed on some or all of the funds that are received. So, it is wise to discuss these situations with a tax adviser prior to moving forward. This is especially the case if the amount of funds being accessed is a substantial sum.
Other Important Factors to Consider
When considering the use of accelerated death benefits, there are several factors to keep in mind. One primary concern is the original need for the life insurance coverage, and whether or not this need still exists. For example, many people purchase life insurance in order to protect a spouse or loved ones from the loss of the insured’s income. If this need still exists, then it may not be wise to deplete the policy’s death benefit.
In addition, collecting the funds from accelerated or living benefits could also affect the recipient’s eligibility for Medicaid benefits. The United States Department of Health and Human Services has said that life insurance policy holders cannot be forced into collecting or requesting living benefits from their policy prior to qualifying for Medicaid coverage. However, should a potential Medicaid beneficiary decide to take accelerated benefits from a policy, once those funds are received the money could affect the individual’s Medicaid eligibility.
Another consideration is that state insurance departments are charged with regulating accelerated death benefits just as they do all other types of insurance products. In fact, all fifty states’ insurance departments have approved the sale of some type of life insurance policy living benefits.
In addition, the National Association of Insurance Commissioners (NAIC) has also developed model regulations concerning these benefits. Within these regulations is specified the qualifying conditions that can be used in order to trigger the payment of living benefits. Also, these NAIC regulations can put a limit on the charges that some insurance companies may deduct from the living benefits in order to compensate themselves for the early payout.
In most cases, in order to be eligible to receive the funds from the policy, the insured will be required to show proof that he or she is considered to be terminally ill. This typically means that the individual is expected to live for 12 months or less – and in certain states, six. Proof from the insured’s physician or other medical professional is usually needed in order to move forward with a living benefits transaction.
Once all of the criteria has been met, and a decision has been made, the funds that are received from a living benefits transaction can truly be a blessing to those who would otherwise be left with substantial medical bills and no way to repay them other than going into debt – or worse.
As life insurance policies continue to evolve, the benefits that are offered through these plans will likely continue to provide for the unique and changing needs of policy holders on a much more broad scale than simply providing just a death benefit or basic cash value payout. If you are ready to look at different types of policies, the use the form on this page to get started with some quotes or contact us directly.