Many life insurance policies now contain a provision enabling a person who is terminally ill to essentially receive an advance, during his or her lifetime, of the “death benefit” that would otherwise have been paid to the designated beneficiaries at the time of his or her death.
“Living benefit” provisions are very different from – and typically much greater than — the amount the policy owner might be eligible to borrow on the “cash value” of a whole life or universal life policy. The living benefit amount is also typically much higher than the “surrender value” of a whole life or universal life policy. Living benefits are also often available on term life insurance policies, even though term life policies have no cash or surrender value.
Do You Have a “Living Benefit”?
“Living benefit” provisions are usually found in riders attached to a policy, but sometimes are included as part of the text of the life insurance policy itself. Widely available on individually purchased life policies, living benefits are sometimes also available on life policies issued through employer groups or professional or similar organizations.
Even if your life insurance policy does not contain a living benefit rider, perhaps because at the time you purchased the policy the company did not offer one, ask the carrier anyway. Even though the policy as issued does not contain a living benefit, the insurance company may be willing to “liberalize” the policy and allow policy owners to receive such benefit, if asked.
In order to be eligible for “living benefits” the person whose life is insured generally must receive a written diagnosis from a physician, often backed up by medical records (which the insurance company will likely investigate), that s/he is suffering from an illness or condition in which it is highly likely to result in death within a stated period of time, typically within 2 years.
How Much is the Benefit?
A typical “living benefit” provision permits payment of up to approximately one-half of the face amount of the policy, subject to a dollar limit, such as $250,000. As living benefit provisions vary from insurer to insurer, as well as policy-to-policy, the insurance company will likely charge interest on from the time it advances payment to the date of death.
Where the person whose life is insured is NOT also the policy owner, the consent of the policy owner would be required. Similarly, if the policy owner has made an irrevocable beneficiary designation, the consent of the irrevocable beneficiary would be required, if the living benefit is available at all.
Requesting the Benefit
Although one would like to think an insurance company would act quickly on a request for living benefits, it makes sense to provide as much documentation as possible with your initial request for living benefits. Be sure to get the insurance company’s forms and fill them out properly the first time.
A few more things you should be aware of. Certain forms of term life insurance – such as 10-year term and 20-year term – only provide death benefits if the death occurs within the 10-or 20-year duration of the policy. Thus, if the policy is near the end of the coverage period (such as in year 9 of a 10-year term life policy), living benefits may not be available because the insured’s death may not occur within the policy period. However, depending on the policy, it is sometimes possible to convert a term policy into a permanent form of coverage (even though the insured would be uninsurable in terms of buying new coverage); although the premium will be much higher than it was for the term coverage, if death is likely imminent it is a wise economic move.