More on Life Insurance
More on Life Insurance
Life insurance riders can provide early access to life insurance benefits while you’re still alive if you fall terminally ill or require long-term care
Permanent life insurance policies usually come with a “cash value component” that can be accessed while you’re still alive
Canceling a life insurance policy only pays out if your permanent policy has a cash value, and doing so means you will no longer be insured (so your beneficiaries will not receive a death benefit when you die)
Life insurance usually works like this: The policyholder selects the best coverage for them and pays a premium each month to their insurance company. Then, if the policyholder dies and the policy is in force, the insurance company distributes the death benefit to the policy’s beneficiaries.
But a wide range of insurance companies and coverage options means that not all life insurance policies follow the same trajectory. In fact, you don’t necessarily have to die to access the crucial financial protection that your life insurance policy provides.
Of the many life insurance coverage options, there are two main categories: term life insurance and permanent life insurance. The best type of life insurance policy for you won’t be the best for someone else and it depends on several factors, including medical history, financial situation and dependents.
Term insurance coverage lasts for a finite period of time (the term), usually 20 years. The death benefit payout for term life insurance is straightforward: if you die while the policy is active, your beneficiaries receive a payout. Term life insurance becomes more complex if you add on certain riders—optional policy additions with extra terms and conditions that are excluded from the baseline policy. Some riders, which we’ll dig into below, enable the policyholder to receive part of the death benefit early.
Permanent life insurance, sometimes called “cash value life insurance,” never expires and lasts for your entire life. The policyholder pays monthly premiums, but a certain percentage goes into a tax-deferred savings component (the cash value). If you have this type of life insurance, you are able to access the policy’s cash value component while you’re still alive, and your beneficiaries still receive a death benefit when you die. As with term insurance, permanent life insurance can be customized with riders.
Below, we’ll get into the scenarios when life insurance can pay out before you die.
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To recap: Life insurance riders are supplemental terms and conditions that activate with your policy, at an extra cost. There are many different types of life insurance riders (sometimes called “living benefits”) you can add regardless of policy type—term or permanent—depending on your specific needs. Riders can be helpful if you have certain illnesses, qualifying medical conditions or require long-term care.
Life insurance riders that provide early access to benefits while the policyholder is still alive include:
|INSURANCE RIDER NAME||DESCRIPTION|
|Accelerated death benefit insurance rider||Provides early access to benefit in cases of terminal illness|
|Critical-illness insurance rider||Provides early access to benefit for treatment of certain illnesses|
|Chronic illness insurance rider||Provides early access to benefit for daily living expenses if disabled|
|Long-term care insurance rider||Provides coverage for long-term care needs, such as in-home nursing|
An accelerated death benefit insurance rider goes into effect when extra financial protection can be particularly helpful, in cases of terminal illness, critical illness, chronic illness or long-term care. The accelerated death benefit can be used to cover medical expenses, nursing home fees, hospice, mortgage or car loan payments and even vacations.
Terminal illness: To qualify for the accelerated death benefit, your insurance company needs a doctor’s or medical professional’s certification that you are terminally ill with a limited life expectancy (usually between 12 to 24 months).
Critical illness: Some insurers may pay out an accelerated death benefit if you have a medical condition or illness that you will survive, but that will leave you with huge medical expenses. This includes cancer, heart attack, stroke, ALS, kidney failure, major organ transplant, coma or paralysis. Sometimes, it makes more sense for policyholders to purchase separate insurance outside of their life insurance policy to specifically cover critical illness (known as critical illness insurance).
Chronic illness: This includes conditions that prevent you from performing two of the following six activities for daily living—eating, bathing, getting dressed, toileting, transferring and continence. Depending on your policy, early payment due to chronic illness could be classified as an accelerated death benefit or as a separate “chronic illness rider.”
Long-term care: Some insurers will pay out part of a death benefit in advance if you are confined in a nursing home for a certain period of time or expect to stay there permanently. Similar to critical illness, it sometimes makes sense to purchase separate insurance outside of to specifically cover long-term care (known as long-term care insurance).
When you access the death benefit before you die (in the form of one of the accelerated death benefits listed above), you and your beneficiaries only receive part of the total coverage amount. For example, if you have $1 million of life insurance coverage, most insurers will only pay out a portion (say, 50%) of that $1 million while you are still alive. The remainder of the life insurance benefit is paid out to your beneficiaries after you die.
Here are some examples of accelerated death benefit amounts (as a percentage of the original life insurance benefit) for different insurance companies. The rider may come with other restrictions or not be available in certain states.
|Insurer||Accelerated death benefit|
|AIG||50%, but benefit maximum varies by policy|
|Banner Life/William Penn||75% or up to $500,000|
|Lincoln||50% or up to $250,000|
|Mutual of Omaha||80% or up to $1 million|
|Pacific Life||$500,000, but benefit maximum varies by policy|
|Principal||75% or up to $1 million|
|Protective||60% or up to $1 million (whichever is less)|
|Prudential||between 70% to 80% if confined to a nursing home; between 90% to 95% if terminally ill; 100% if you require a life-saving organ transplant|
|SBLI||50% or up to $250,000|
|Transamerica||100% or up to $1.5 million (whichever is less)|
The bottom line: If you received an accelerated death benefit while you were alive, your beneficiaries will still receive a death benefit when you die. But the amount will be adjusted by your individual insurance company according to how much you withdrew.
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As mentioned above, permanent life insurance is sometimes referred to as “cash value life insurance” because, you guessed it, it has a cash value component. The cash value component is another way (separate from life insurance riders) for you to access benefits before you die and depends on the insurance company and the type of insurance.
Here’s how it typically works for the following three most common types of permanent life insurance:
Whole life insurance: the cash value accrues interest depending on the rate set by the insurance company.
Variable universal life insurance (VUL): works similar to a mutual fund. The insurer invests your cash value into sub-accounts and the performance of these accounts determines the value of your cash over time.
Indexed universal life insurance: the cash value is invested in a stock market index selected by your insurance company (such as the Dow Jones Industrial Average or the S&P 500). Unlike a regular index fund, most policies have an interest rate floor and interest rate ceiling, so the cash value growth will stay within a certain range.
If you have a permanent life insurance policy with a cash value component, you can access a portion of the cash value but the amount will depend on the carrier. Accessing the cash can come with administrative fees and sometimes other expenses. Permanent life insurance with a cash value component can be useful for people who may have maxed out every other investment account. Choosing how to cash out your life insurance policy will depend on your unique circumstances.
Proceed with caution before withdrawing cash or taking out a loan against your permanent life insurance policy. It takes a long time for the cash value to accumulate and if you withdraw more money than your basis (the amount of premiums paid), it’s considered a “policy loan” and you’ll have to pay the money back—with interest.
For example, if you own a $3 million permanent life insurance policy with a cash value component, how long you’ve had the policy will determine how much cash you’ve accumulated. After 10 years, your cash value basis might equal $500,000. At that point, you could withdraw any amount interest free up to 95% of the cash value basis. This percentage might vary based on your insurance company and you might still have to pay taxes or other fees. If you need more than $475,000, you could take out a loan against your $3 million policy.
Taking out a loan against your life insurance may be easier than finding a loan elsewhere because it enables more flexibility for repayment schedules and allows your cash value to continue accruing interest over time. But think of this as a last resort. If you don’t pay back the policy loan while you are alive, it would come out of the death benefit paid out to your beneficiaries when you die. And if you decide to take out the entire cash value balance, you would forfeit the life insurance coverage altogether.
If you surrender your policy because you no longer require life insurance or because the monthly premiums are too costly, you can get the accrued money from the cash value. This is different from term life insurance policies, which do not pay out any money if they are surrendered. When you surrender your life insurance policy, you will no longer be insured and your beneficiaries will not receive a death benefit when you die. Depending on how long you’ve had the policy, you might have to pay surrender fees and taxes as well.
Selling your permanent life insurance policy is an option, but it’s generally not recommended. Selling a life insurance policy (also known as a life settlement) means you get cash from a third party broker or buyer, who in turn continues to pay your premiums and then receives the death benefit when you die. Payouts for selling a permanent life insurance policy tend to be very low and come with additional costs. Similar to surrendering the policy, when you sell your policy you will no longer have insurance and therefore your beneficiaries will not receive a death benefit when you die.
Canceling or surrendering a life insurance policy is a big financial decision and doing so means you will no longer be insured. This means that when you die, your loved ones will not receive a death benefit from your former insurance company.
A term life insurance policy ends automatically when the term (usually 20 years) is up. If your term ends and you still have dependents who rely on your income, it’s wise to shop around again for a new policy. Because premiums are determined by age and health, the same policy you bought when you were 35 might not be the best policy when you’re 55. Depending on your needs, you might be better off purchasing a final expense life insurance policy to cover funeral expenses as opposed to a new term life insurance policy.
If you choose to cancel an existing term life insurance policy before it expires, you will not receive any payout and the premiums you paid throughout the course of your policy ownership will remain with the insurance company.
A permanent life insurance policy does not expire, but the high monthly premiums can be hard to justify if no one relies on your income anymore. If you choose to cancel or surrender your permanent life insurance, as we mentioned above, you will usually be able to keep the cash value component. The payout stipulations vary by insurer, so talk to your insurance company or independent broker before canceling to make sure it makes sense for you financially.
While you don’t have to die to collect life insurance, accessing funds while you’re still alive comes with significant trade-offs. If you require emergency funds for certain illnesses or medical procedures, you can usually access accelerated death benefits without hefty costs. But tapping into your policy’s cash value component (if you have one) may not always be a good idea. Taxes, hidden fees and interest on withdrawals and loans can take money away from the death benefit paid out to your loved ones when you die, leaving them without the safety net life insurance provides.
Rebecca Shoenthal is an insurance editor at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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