Last updated: November 29th, 2022
Reviewed by
Paige Geisler
Licensed Insurance Agent
Table of Contents
Living benefits of life insurance are benefits the policyholder can use while still alive, as opposed to the death benefits that are paid out after their death. If a policyholder has a life insurance rider offering living benefits, sometimes called accelerated death benefits, they can access the money from their life insurance policy to pay certain expenses. When living benefits are accessed, the amount of the death benefit at the policyholder’s passing is reduced.
Living benefits are typically available to cover expenses associated with a chronic or terminal illness. A policyholder can access these benefits to cover end-of-life care if they receive a terminal diagnosis. Insurance providers may require a life expectancy, or waiting period, from 6 months to 2 years, to release the benefits.
Policyholders with critical or chronic illnesses may also be able to access their living benefits. A critical illness rider on your life insurance lets you access benefits if you incur an illness that reduces your life expectancy, such as a stroke, kidney failure, or a heart attack.
In addition, other riders on your life insurance policy provide access to living benefits if you require long-term care or have been diagnosed with a chronic illness that hinders your ability to perform the activities of daily living (ADLs). Typically, you must be unable to perform two out of six ADLs, which include independent bathing, continence, eating, getting dressed, using the toilet, and getting in and out of a bed or chair.
You may receive living benefits in a lump sum, or you may be able to access them as needed. Your life insurance policy will probably limit the total amount of funds accessed to 80% of your policy’s death benefit.
Taking advantage of living benefits is only one way to use life insurance while still alive. If you have permanent life insurance, you may be able to tap into the cash value of the policy. Most insurance providers let you take a loan, or you may be able to withdraw money from the accumulated cash value directly. In both cases, the death benefits of the policy will be reduced. If you take out a loan, you may be able to repay the loan and thereby also restore the policy’s death benefits.
The third way to use life insurance while alive is to sell your policy in what’s known as a life settlement. Typically, a buyer will pay you more than the current cash value of the policy, but less than its full value. The policy remains in place, but the purchaser, who becomes the beneficiary, takes over the premium payments. In exchange, the purchaser will pay you the agreed-upon sum either in one lump payment or as an annuity that pays out regularly over time.
People with a chronic or terminal illness can find the money they need for medical expenses by accessing their life insurance while still alive. They can do this via their living benefits.
Sometimes people realize that they no longer need life insurance because they built up adequate resources to provide for their heirs. In this event, they may want to cash out their life insurance policies, so they have access to the money. They can use this cash for anything they want, including making other investments, going on vacation, or paying for their retirement.
Your personal and financial situation determine whether cashing out your life insurance policy is the right choice. If you need money and don’t have access to other lending sources, taking money out of your life insurance could be a lifesaver. Other benefits from taking cash out of your life insurance policy include the following:
Taking cash out of your life insurance policy may be the right answer for your situation, especially if you’re struggling to pay medical bills due to a chronic or terminal illness. However, no matter your reason for cashing out on your life insurance policy, you’ll pay a price of some kind for doing so. Among the drawbacks of cashing out are the following:
Cash value refers to the accumulated value in your permanent life insurance. The insurance policy acts as a sort of savings account as you make premiums. Once you accumulate enough cash value, you have the option of borrowing from it, withdrawing cash, or using the cash value to pay your premiums.
Term life insurance has no cash value. Only permanent life insurance carries any cash value, paid for by the higher premiums this type of insurance charges.
A living benefits rider adds additional protection to your existing life insurance policy by allowing early use of the policy’s benefits. Typically, the rider is activated if the policyholder is diagnosed with a terminal illness and has a diminished life expectancy of about 1 year. Under this rider, the policyholder can access the cash accrued in the policy to pay medical bills and end-of-life costs.
Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
Paige is an assistant agent for State Farm and is licensed to sell property and casualty, health, and life insurance in Virginia. She handles all different types of insurance and financial services and is currently working on a securities and bonds license. Paige has a degree from Radford University in English and is a certified notary.
