Living Benefits of Life Insurance
Living benefits let you access funds from your life insurance while you're still alive, helping cover medical expenses, long-term care, or other financial needs. Learn how they work.
Life insurance and living benefits
Despite its name, life insurance is meant to benefit you and your loved ones after death. But did you know you could also use life insurance benefits while you’re still here? Selecting a rider with living benefits can offer funds to tap into while you’re still alive. This type of rider is available for both term life and whole life insurance policies. With term life policies, living benefits are accessed via riders that you pay to add on to your policy. Whole and universal life insurance policies operate on a cash value system, allowing policyholders to draw funds from that pool of money without any riders. Read on to learn more about living benefits and what they can be used for.Â
Key takeaways
- Life insurance policies with living benefits provide access to funds while still alive
- Living benefits can cover medical or long-term care expenses via riders or cash value
- Living benefits types include ADB riders for terminal, chronic, or critical illness and LTC riders
- Accessing living benefits reduces death benefits to beneficiaries; cost and availability vary
Living benefits of term life insurance
With term policies, living benefits are included in two types of life insurance riders: accelerated death benefit (ADB) riders, three of which are long-term care (LTC) riders. Some living benefits are automatically included in a policy at no additional cost, but others are considered add-ons and will increase your premium.Â
Living benefits are designed to provide policyholders access to a portion of their death benefit while they are still alive. For example, living benefits may help you cover medical care costs in an extreme health concern, like a terminal or chronic disease. The National Cancer Institute calculated the average cost of medical care and drugs tops $42,000 in the year following a cancer diagnosis. Some treatments can exceed $1 million.[1] Even on the low end, that’s more than half of the average American’s yearly salary.
These funds are most often accessed when a medical diagnosis indicates the policyholder has a terminal illness. To receive a payout from a rider with living benefits, a medical professional needs to conduct an exam and confirm you only have 6-12 months to live. In this case, one of the ADB riders would be used.Â
Accelerated death benefit riders include:
For an illness in which you are given a terminal diagnosis, you can use your living benefits to cover end-of-life care and associated costs. This one is often automatically included in your policy.
This rider is applicable if a chronic illness prevents you from performing a minimum of two of the six activities of daily living — bathing, eating, getting dressed, toileting, transferring and continence.
An illness that shortens life expectancy and incurs high medical bills is considered critical. You can access living benefits with the critical illness rider after a serious medical event like a stroke, heart attack, or kidney failure.
Long-term care rider
The long-term care rider is most similar to the chronic illness section of ADB riders. The LTC rider is meant to provide additional benefits for long-term care expenses. It is activated when a medical condition prohibits you from performing two of the six activities of daily living. This rider is considered an add-on and will significantly impact your premiums — it is not automatically included like the terminal illness benefit.Â
Living benefits of permanent life insurance
Living benefits in life insurance vary by policy type. Term life insurance typically requires riders (added at an extra cost) to include living benefits. In contrast, whole and universal life insurance—both cash value policies—automatically provide living benefits through accrued cash value.
Ways to access cash value in permanent life insurance:
- Sell your policy:Â You can sell a life insurance policy through a life settlement or a viatical settlement.
- Policy loan: Use your cash value as collateral to borrow money.
- Policy surrender: Cancel your policy to receive the cash value, eliminating your death benefit.
- Premium payments: Apply cash value to cover policy premiums.
In terms of life insurance, liquidity has to do with how easy it is for a policyholder to withdraw funds from a policy. While most policies provide a cash (aka liquid) payout to one’s beneficiaries after the policyholder’s death, some also allow liquidity while the insured person is still alive. Under these policies, the policyholder can use direct withdrawals or take loans against the cash value of their permanent life insurance policy.Â
Any liquidity obtained while the policyholder is alive is known as a living benefit. Life insurance policies offering living benefits are those with a cash value and those with one or more accelerated death benefit riders, which are given to policyholders diagnosed with serious (normally terminal) illnesses.
How do living benefits work?
The living benefit pulls from your death benefit in term policies, so if you need to access funds to cover medical or end-of-life expenses while you’re alive, you can. However, accessing living benefits reduces the death benefit available to your beneficiaries after you die, as you have already withdrawn from that pool of money.Â
Accessing living benefits requires filing a claim with your life insurance company. The company will ask for documentation supporting your medical diagnosis and your payout may come as a lump sum or be dispensed periodically. Keep in mind that there also may be a limit to the amount you can withdraw, depending on your death benefit. Also, if you repay the amount you've withdrawn, your death benefit may be fully reinstated.
Ways to use liquidity in your policy
There are several ways to get or borrow money from your life insurance policy, which we’ll get into. But first, a note on everyone’s favorite subject: taxes. If you withdraw cash from your life insurance policy (up to the amount of paid premiums), it’s tax-free and considered a return of premiums. That said, you should contact your life insurance agent or financial advisor to learn about any and all tax implications.
As a policyholder, you can sell your life insurance policy through a life settlement (if you're older) or a viatical settlement (if you have a serious illness), receiving a lump sum that’s more than the cash value but less than the death benefit. The buyer becomes the new beneficiary, takes over premium payments, and collects the death benefit when you pass. Selling your policy can provide cash if you can’t afford premiums, but proceeds may be taxable and could impact Medicaid or other benefits.[2]
By surrendering your life insurance policy to the insurance company, you may be able to access cash against the policy’s full value. You need to permanently terminate your insurance coverage in exchange for your life insurance policy’s cash surrender value. If you surrender your annuity, the amount you receive is the annuity surrender value.Â
Additionally, any amount received beyond the total premiums paid (known as the cost basis) is considered taxable income. Surrender charges may also apply, especially if the policy is terminated early, reducing the amount you receive. Given these implications, it's advisable to consult a financial advisor before proceeding.[3]
In whole and universal life insurance, the accumulated cash value can be used to cover premium payments instead of paying out of pocket. Policyholders can either withdraw cash value directly, use automatic premium loans, or apply dividends (for whole-life policies) toward premiums. Some policies also allow switching to a reduced paid-up policy, eliminating future payments while maintaining a smaller death benefit. However, depleting cash value can reduce coverage or cause the policy to lapse if funds run out.[4]
If the cash value has grown enough, you can borrow money from your life insurance policy as a policy loan. As long as you continue paying your premiums on time and you have sufficient cash value, you can skip the usual loan approval process — which can be a benefit of going down this route. Plus, there are no fixed repayment schedules for these types of loans.Â
You should always talk to your insurance agent before to understand all the conditions.Â
And remember that a life insurance policy should not be the only asset in your portfolio. When you sell or surrender your policy, you may earn less profit than what you’ve already paid out in premiums. But, if you’ve exhausted other options, these policies can be valuable investments with low interest rates.
How to get a life insurance policy with living benefitsÂ
In most cases, living benefits are included in insurance riders that a policyholder elects to add to their term life insurance policy. Riders of any kind will increase your policy premium, but remember that the terminal illness rider is often included in a standard life insurance policy. A permanent, cash-value insurance policy will have funds you can consider living benefits if needed.
Most people opt to include riders when they first enroll in a life insurance policy, so if you’re shopping for a new policy, it’s a good time to explore your options. It is possible to add on riders later, but a waiting period may be enforced before you can make a claim and access the funds.
Remember that a life insurance policy should not be the only asset in your portfolio. When you sell or surrender your policy, you may earn less profit than what you’ve already paid out in premiums. But, if you’ve exhausted other options, these policies can be valuable investments with low interest rates. If you're unsure about selling or canceling a policy, there may be other options, such as a partial surrender or a conversion.[5]
Frequently asked questions
Medical Care Costs Associated with Cancer Survivorship in the United States. American Association of Cancer Research
How to Sell a Life Insurance Policy Safely and Effectively. LegalClarity
Surrendering a Life Insurance Policy: Tax Consequences Explained. Accounting Insights
Navigating Viatical Settlement Taxation. Smart Financial Blog
Alternatives to Lapsing or Surrendering Life Insurance. TRC Financial
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