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People buying life insurance often think only about the death benefit, but many policies have features called “living benefits” that allow the policy owner to benefit from a life insurance policy before the death of the insured. Here are some examples:
Terminal Illness Rider - Also, called accelerated death benefit rider, allows the policy owner to receive part of the death benefit when the insured is diagnosed with a terminal illness. These funds are received tax free and without restriction on how they are used. Many families use these funds to pay for medical care that health insurance won’t cover; pay off debts and get the insured’s affairs in order; or even take a vacation and make lasting memories while the insured is still alive.
Chronic Illness Rider - Many life insurance plans now offer riders to help defray the cost of a future chronic illness. A chronic illness is defined as one that causes an individual to require assistance with at least two activities of daily living (bathing, dressing, eating, transferring from a bed to a chair, continence, or toileting) or a significant cognitive impairment for at least 90 days. Separate insurance can be pricey, so having a chronic illness option on a life insurance policy makes good financial sense.
Tax-Free Loans - The cash value of a permanent life insurance plan is a stable asset and a valuable part of a financial portfolio. Many people don't realize that whole life insurance is a financial asset, and many advisers recommend having 5-10% of your net worth in life insurance cash value.
With whole life insurance, the first money put in is the first money that comes out. If the policy has been in force long enough, policy owners can borrow against the cash value, tax free. This is an extraordinarily powerful financial tool. If an emergency fund is depleted due to unforeseen circumstances, life insurance cash value is there. Cash-value loans can pay college tuition. (As a bonus, most applications don't consider life insurance cash value when determining eligibility for grants, scholarships, and financial aid.) The cash value of a life insurance policy also can provide tax-free retirement income. It’s important, though, to monitor policy loans so the policy doesn’t lapse and cause an expensive “taxable event.”
Living benefits greatly increase the value of life insurance, but they aren’t always considered when life insurance plans are compared. Knowing how these benefits work and how and when to access them can give the owner a significant financial advantage.