Throughout the years, the vast majority of life insurance policies have been purchased for their death benefit coverage. But today, more carriers are offering the ability for insureds to access a portion of the face amount — in some cases, up to 90 percent or more — while still alive, provided that they meet certain qualifications. This can be accomplished through living benefits.
Living benefits are also referred to as accelerated death benefits. Having these benefits will essentially "accelerate" a portion of the death benefit on the policy so that the funds can be used prior to the insured's passing. These benefits can be added as a rider to a life insurance policy at the time that it is purchased, or alternatively, it can be added at a later time.
Accessing living benefit funds
Living benefit funds can be received either as one single lump sum, or they can be taken by the insured in regular installments. While the insured must qualify based on a health or medical condition to receive the cash, the money doesn't have to be spent on medical bills.
So, if the individual wants to pay off their insurance deductible or the cost of their medical procedures, they can do so. But if they would rather use the funds to take a vacation, they can do that, too.
The amount of the cash that is accessed will be applied against the policy's death benefit. It is thus important to consider how much survivors will need at the insured's death and whether decreasing the amount of the death benefit will create a potential hardship for beneficiaries.
The money received by the insured is typically not subject to federal income tax, provided that the distribution meets certain criteria. This criteria includes the insured being classified as terminally ill when filing an income tax return.
Also, living benefits from life insurance policies aren't subject to state income tax in most U.S. states. (There may still be some instances where taxes are due, though, so it is always best to check with a tax advisor in this situation).
Policy holders need to keep in mind that even though the death benefit will be reduced when they receive living benefit funds, they will still be responsible for paying the policy's premium, as this will keep the remainder of the policy in force.
