Life Insurance that Kicks in Prior to Death

Life Insurance that Kicks in Prior to Death

Most Prudent individuals with a family have life insurance in place, but what happens if you have a life-debilitating illness or injury that leaves you incapable of working and which renders you struggling to hang on to life? The financial consequences of a terminal illness can be catastrophic. Developing cancer, suffering a heart attack or being seriously injured in an accident can leave you and your loved ones scrambling to make ends meet. For people in that position, it makes sense for life insurance benefits to kick in so that they can be used while the covered individual is still alive.

The term for this type of insurance is “living benefits,” which typically comes in the form of a rider to a life insurance policy. A living benefits rider helps people to receive care and pay for chronic or terminal illness that precedes death. The rider entitles the policyholder to an early and accelerated payout of policy death benefits, if the insured is diagnosed to have a life expectancy of 12 months or less. The rider can help make the insured’s remaining time as comfortable and as dignified as possible, and also keep the family from financial ruin.

Often the majority of our health care expenses come during our end-of-life stage. And that leaves many terminally ill patients facing financial hardship during the worst possible time. Unfortunately, a simple life insurance policy will not step in to pay benefits until the insured has passed. The living benefits rider breaks down that barrier. The policyholder can access up to $250,000 or more of eligible policy proceeds, depending on the type of contract. This payment, made to the policyholder rather than the beneficiary, reduces the cash value and death benefit, so it dilutes what the policyholder’s beneficiaries will receive upon his or her death. Policyholders without this rider and in this situation have two options for accessing funds: 

  • A policy loan 
  • A policy surrender

In most cases, however, the rider may provide more funds than either of these options. This is because policy loans or surrenders are usually based on cash value, while the amount available from the living benefits rider is generally based on the policy’s face value, paid-up additions, and (if applicable) a sum payable under a rider that provides a level amount of insurance. The rider may be exercised only once and it will be terminated once the policyholder makes a claim for accelerated benefits.

At the policyholder’s request, this rider can be added to new or existing policies for a one-time charge, which is applied when the rider is exercised. The policy owner merely has to elect living benefits coverage, and can choose to do so anytime. Benefits are tapped when the policyholder presents the insurance company with proof that they have a terminal illness or have been given a certain time to live based on their circumstances. If you have any questions about this voluntary benefit and why you should consider offering it to your employees, contact us today.

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