Term Life Insurance With Living Benefits: A Lifesaver for Chronic Illness

 

Life insurance is a valuable financial tool that can protect your loved ones from the unexpected loss of your income if you pass away. But what if you don’t die, but instead suffer from a chronic illness that affects your ability to work and live normally? How can you pay for the medical bills, long-term care, and other expenses that come with a chronic condition?

That’s where term life insurance with living benefits comes in. This type of life insurance policy not only provides a death benefit to your beneficiaries if you die during the term, but also allows you to access a portion of that benefit while you’re still alive if you meet certain criteria. In this article, we’ll explain what term life insurance with living benefits is, how it can help you in case of chronic illness, and how to choose and use a policy that suits your needs.

Benefits of Term Life Insurance With Living Benefits

Term life insurance is a simple and affordable type of life insurance that covers you for a specific period of time, usually between 10 and 30 years. If you die during the term, your beneficiaries receive a lump sum payment, known as the death benefit, which they can use for any purpose, such as paying off debts, covering funeral costs, or replacing your income.

Term life insurance with living benefits adds another layer of protection to your policy by allowing you to access some or all of the death benefit before you die if you are diagnosed with a terminal, chronic, or critical illness. These are also known as accelerated death benefit riders or living benefit riders, and they may be included in your policy automatically or for an extra fee.

There are different types of living benefit riders that cover different scenarios, such as:

• Terminal illness rider: This rider pays out a percentage of your death benefit (usually up to 50% or 75%) if you are diagnosed with a terminal illness and have a life expectancy of less than 12 or 24 months (depending on the insurer). You can use this money to pay for end-of-life care, hospice, or any other expenses you may have.
• Chronic illness rider: This rider pays out a percentage of your death benefit (usually up to 25% or 50%) if you are diagnosed with a chronic illness that prevents you from performing two or more activities of daily living (ADLs), such as bathing, dressing, eating, toileting, transferring, or continence. You can use this money to pay for long-term care, in-home care, or any other expenses you may have.
• Critical illness rider: This rider pays out a percentage of your death benefit (usually up to 25% or 50%) if you are diagnosed with a critical illness that is specified in your policy, such as cancer, heart attack, stroke, kidney failure, organ transplant, or paralysis. You can use this money to pay for medical bills, treatments, or any other expenses you may have.

Term life insurance with living benefits has several advantages over other types of life insurance and insurance products that may offer similar benefits, such as:

• Affordability: Term life insurance is generally cheaper than permanent life insurance (such as whole life or universal life), which also provides a death benefit but lasts for your entire life and accumulates cash value. Term life insurance with living benefits may cost slightly more than regular term life insurance without living benefits, but it is still more affordable than buying separate policies for life insurance and critical illness insurance or long-term care insurance.
• Flexibility: Term life insurance with living benefits gives you more options and control over how you use your policy. You can choose whether to access your living benefits or not depending on your situation and needs. You can also choose how much of your death benefit you want to accelerate and how often (subject to the limits and conditions of your policy). You can use the money for any purpose you want without any restrictions or approvals from the insurer.
• Tax benefits: Term life insurance with living benefits may offer some tax advantages depending on how you receive and use the money. Generally speaking, the death benefit of a life insurance policy is tax-free for your beneficiaries. The living benefits may also be tax-free if they are paid out as a lump sum and meet certain requirements under the Internal Revenue Code Section 101(g). However, if they are paid out as periodic payments or used for long-term care, they may be subject to income tax or subject to a different tax treatment. You should consult a tax professional before accessing your living benefits to understand the tax implications.

Term life insurance with living benefits can be a lifesaver for people who face the risk of chronic illness. Here are some examples of how this type of policy can help you in different situations:

• You are a 40-year-old single parent with two young children and a mortgage. You buy a 20-year term life insurance policy with a $500,000 death benefit and a chronic illness rider. Five years later, you are diagnosed with multiple sclerosis, which affects your ability to work and care for yourself and your children. You decide to use your chronic illness rider and receive 25% of your death benefit ($125,000) as a lump sum. You use this money to pay off your mortgage, hire a caretaker, and cover other expenses. Your policy remains in force, but your death benefit is reduced to $375,000.
• You are a 50-year-old married couple with no children and a comfortable retirement savings. You buy a 30-year term life insurance policy with a $1 million death benefit and a terminal illness rider. Ten years later, one of you is diagnosed with stage 4 cancer and has a life expectancy of less than 12 months. You decide to use your terminal illness rider and receive 50% of your death benefit ($500,000) as a lump sum. You use this money to travel the world, fulfill your bucket list, and enjoy your remaining time together. Your policy remains in force, but your death benefit is reduced to $500,000.

How to Choose a Term Life Insurance With Living Benefits Policy

If you are interested in buying a term life insurance with living benefits policy, there are several factors you need to consider before making a decision, such as:

• Coverage amount: This is the amount of money your beneficiaries will receive if you die during the term of the policy. It should be enough to cover your financial obligations and goals, such as paying off debts, replacing your income, funding your children’s education, or leaving a legacy. The coverage amount will also affect how much living benefits you can access if you become ill. A general rule of thumb is to buy a policy that is 10 to 15 times your annual income, but you may need more or less depending on your situation and needs.
• Term length: This is the duration of the policy, usually between 10 and 30 years. It should match the period when you need the most protection, such as until you retire, pay off your mortgage, or raise your children. The term length will also affect the cost of the policy and the likelihood of using the living benefits. A longer term may cost more but provide more coverage and flexibility. A shorter term may cost less but provide less coverage and flexibility.
• Rider options: This is where you can customize your policy with additional features that provide more benefits or protection. As we mentioned earlier, there are different types of living benefit riders that cover different scenarios, such as terminal illness, chronic illness, or critical illness. Some policies may include one or more of these riders automatically or for free, while others may charge an extra fee or require additional underwriting. You should compare the rider options offered by different insurers and choose the ones that suit your needs and budget.
• Cost: This is the amount of money you have to pay for the policy, usually in monthly or annual premiums. The cost of term life insurance with living benefits depends on several factors, such as your age, health, lifestyle, coverage amount, term length, rider options, and the insurer’s rates. You should shop around and compare different quotes and policies from different insurers to find the best deal for your situation.

How to Use Term Life Insurance With Living Benefits

If you have a term life insurance with living benefits policy and you become eligible to use it due to a terminal, chronic, or critical illness diagnosis, here are some steps you need to follow:

• File a claim: You need to contact your insurer and inform them that you want to use your living benefits. You will have to fill out some forms and provide proof of your diagnosis and life expectancy from a licensed physician.
• Receive payments: Once your claim is approved, you will receive the payments from your living benefits according to the terms and conditions of your policy. You may receive them as a lump sum or as periodic payments over time. You may also choose how much of your death benefit you want to accelerate and how often (subject to the limits and conditions of your policy).
• Use the money: You can use the money from your living benefits for any purpose you want without any restrictions or approvals from the insurer. However, you should use it wisely and responsibly to cover your expenses and improve your quality of life.

Using term life insurance with living benefits has some implications that you need to be aware of:

• Reduced death benefit: When you use your living benefits, your death benefit will be reduced by the amount you receive, plus any interest or fees that may apply. This means that your beneficiaries will receive less money when you die. You should inform your beneficiaries about your decision to use your living benefits and how it will affect them.
• Unchanged premiums: When you use your living benefits, your premiums will not change, unless you have a return of premium rider that refunds your premiums if you outlive the term. This means that you will continue to pay the same amount for a reduced death benefit. You should make sure that you can afford to pay the premiums and that they are worth the coverage you receive.
• Tax implications: When you use your living benefits, you may have to pay taxes on the money you receive, depending on how you receive it and how you use it. Generally speaking, if you receive it as a lump sum and meet certain requirements under the Internal Revenue Code Section 101(g), it may be tax-free. However, if you receive it as periodic payments or use it for long-term care, it may be subject to income tax or a different tax treatment. You should consult a tax professional before using your living benefits to understand the tax implications.

Conclusion

Term life insurance with living benefits is a type of life insurance policy that provides a death benefit to your beneficiaries if you die during the term, and also allows you to access a portion of that benefit while you’re still alive if you are diagnosed with a terminal, chronic, or critical illness. This type of policy can help you cover your expenses and improve your quality of life in case of chronic illness, while also providing protection for your loved ones.

Term life insurance with living benefits has several benefits over other types of life insurance and insurance products, such as affordability, flexibility, and tax benefits. However, it also has some implications that you need to be aware of, such as reduced death benefit, unchanged premiums, and tax implications.

If you are interested in buying a term life insurance with living benefits policy, you need to consider several factors before making a decision, such as coverage amount, term length, rider options, and cost. You also need to follow some steps to use your living benefits if you become eligible due to a terminal, chronic, or critical illness diagnosis.

Term life insurance with living benefits can be a valuable financial tool that can protect you and your loved ones from the unexpected risks of chronic illness. If you want to learn more about this type of policy and get a quote, please contact us today or visit our website.