If you’ve done any financial planning, you likely already understand the importance of life insurance. You have a general idea of how much coverage you need, whether to choose term or a whole life policy, and who your beneficiaries will be. But there’s one aspect you may not have considered: the living benefits rider.
A living benefits rider (LBR) is an add-on available for many life insurance policies. It allows you to access funds while you’re still living under certain conditions. But do you really need this optional benefit, and how might it help your family?
What Is A Living Benefits Rider?
A living benefits rider is also referred to as accelerated death benefits or a living needs benefit rider, depending on the insurance company providing it. It’s an optional piece of coverage that you can add on to your new life insurance plan with many providers. Some providers will allow you to add it on to existing policies, though this can often involve a fee.
The purpose of the living benefits rider is to allow the policy owner the opportunity to use his or her life insurance benefits early in the case of serious injury, terminal illness, or other debilitating medical condition. Serious illnesses and injuries could affect your ability to earn an income. The LBR is allows a policyholder to offset this issue by accessing life insurance benefits prior to death.
Benefits are occasionally unrestricted, too. This means that with some insurance companies, you can receive your benefit before you pass away. You could use these funds for things like adult daycare, home modifications (such as a wheelchair ramp or other equipment that your health insurance may not cover), or nursing home care. With certain companies, you can even use it for expenses that improve your quality of life. Such as taking that trip you and your spouse always dreamed of.
Check with your insurance company to see if any restrictions apply, and what proof is necessary before utilizing your benefits.
Who Can Use It?
As mentioned, the living benefits rider is reserved for policyholders who encounter a dramatic change in their health. Most often the insurer requires that the injury or illness result in a life expectancy of between six and 24 months. Again, the life expectancy requirement varies between policy providers, so be sure to check what your own insurance company requires.
All insurers also require proof of your medical condition, injury, or diagnosis before you can take advantage of your accelerated death benefits. Check the fine print for what type of proof is required.
How Much Do You Get in Advance?
Typically, a living benefits rider will pay the policyholder somewhere between 24 and 100 percent of the life insurance policy’s total death benefit. But many of these also involve a set dollar limit. So if you have a substantial death benefit, you may max out at the dollar limit before you reach your maximum percentage.
Again, be sure to check your own policy to see how much the insurance company will pay out. And remember, you can only use this benefit once. Once you’ve used the living benefit, the insurer will terminate this particular rider. This information can help you decide whether taking the benefit is in your family’s best interest.
What if your policy pays out a living benefit of less than 100 percent of the death benefit? In this case, the insurer will issue the remaining amount to your beneficiaries upon your passing. So, if your policy allows you to take 50% in an accelerated death benefit, your family will still receive the remaining 50% when you die.
After you take advantage of the living benefit, the insurer will often update your policy to reflect the remaining death benefit. This revised policy remains active until you pass away, as long as you continue to pay premiums. But your premium payments will be adjusted to suit the new death benefit amount.
Are These Benefits Taxable?
Changing when and why your insurance company pays out on a policy has the ability to trigger some taxes.
Luckily, if you need (or want) to take advantage of an accelerated death benefit, the proceeds are not taxable, according to the federal government. This applies to all payouts received after January 1, 1997.
However, depending on where you live, you may be subject to taxation at a state level. Before opting in on a living benefits rider, check with a tax advisor and see what the implications may be.
Are There Fees Involved?
Life insurance companies aren’t only offering these living benefits out of the kindness of their hearts. Yes, there is a buck to be made on their end, too.
With some companies, the rider is included on all policies, free of charge. For others, it’s an optional service you can add to your policy. This add-on is sometimes free or may also involve a one-time fee when you first sign up. You usually need to opt in for the rider when you first purchase your life insurance policy, but some companies will allow you to add it later. Just note, if you add it at a later date, there is often a holding period during which you can’t use the benefit.
If you end up actually utilizing the rider and accepting benefits early, there are often fees involved. These can be a percentage of the payout amount or a flat administrative fee. Some insurance companies will take it out of the benefits that you receive. Meaning you will receive slightly less than you were anticipating. Others will apply any fees to the remaining death benefit. Which means your beneficiaries will receive less than they were expecting.
With so many variables in play, it’s important to ask as many questions as possible before signing on the dotted line. Be sure to get clear answers in writing as to whether accelerated death benefits are available, how much the rider costs, what the restrictions are, the fees involved if you use the benefit, and any other stipulations involved.
You should also consult with your tax advisor to see if there are any state tax obligations involved with the rider, should you choose to use it.
A living benefits rider is an incredibly valuable tool if you’re faced with a terminal illness. Is it right for you?