Do you have the peace of mind knowing your business could survive even if you had a heart attack? What about stroke or cancer; would you have access to money to cover the expenses?
Did you know life insurance could be so much more than just death insurance and in fact help out while you are still alive?
It is not a secret that the world is constantly evolving. This applies to the life insurance industry as well. Companies are paying attention to their customer’s needs and are innovating and changing in order to address these needs. The question can you and your business survive financially after a major health event such as a heart attack comes up quite often. In this post, we would address this and other questions, while introducing you to a new concept in life insurance: Living Benefits. We would explain why you need to take a second look at your coverage and ensure you actually have life insurance, not just death insurance.
What are living benefits in life insurance?
We felt it is appropriate to start here and explain what exactly are living benefits and how they can help a small business owner.
First off living benefits are referred to as Accelerated Benefit Riders (ABR) within a life insurance policy contract. We’d like to think of them as a “modern take on life insurance”. It essentially allows the owner of the policy to file a claim against the death benefit and receive a portion of it while the insured is still alive. In other words, life insurance with this rider could payout even if you are still alive. You don’t have to die to use the policy.
You could qualify for acceleration if you are diagnosed with a qualifying medical condition, also referred to as a trigger. The conditions vary amongst the companies, however, generally, they are divided into 3 groups:
Under this group you can accelerate your death benefit if you are diagnosed with any of the following conditions:
- Heart Attack,
- Invasive cancer,
- End Stage Renal Failure
- Major Organ Transplant,
- Arterial Aneurysms,
- Central Nervous
- Major Multi-System Trauma and ect
Chronic – this classification is offered compared to Long Term Care insurance. While it could have some similarities, we want to point out that the two are different.
You could qualify for acceleration, if you are not able to perform without substantial assistance at least 2 of the 6 activities of daily living (bathing, continence, dressing, eating, toileting, transferring) or severe cognitive impairment. Typically, there is 90 days waiting period before you are eligible to file a claim and receive the benefit.
Terminal – this is a common option in many life insurance policies- it allows you to accelerate the policy if you are diagnosed with a terminal condition that is expected to result in death within 12-24 months.
Why a business owner needs to consider life insurance with living benefits
Since now you have a better understanding of what exactly are living benefits, we would like to turn our attention on how living benefits can help you as a business owner. We can best demonstrate this with an example.
Meet Matt. Matt is 40 years old in relatively good health. He is in a partnership with Steve and both run a small bike shop. Even though Matt tries to take care of himself by eating healthy and working out, he suffers a major heart attack. Luckily he survives, but he is still in the hospital and has a long way to recovery ahead of him.
Steve is left to run the business and without Matt, he needs to hire temporary help to pick up some of Matt’s responsibilities.
Matt and Steve had purchased life insurance with living benefits on each other as part of their business plan. They wanted to ensure that should something happen to either one of them, the other would have enough funds to keep the business going.
Matt’s policy is for $500,000. After assessing their current situation, they decide to file a claim against the policy and apply it to accelerate $100,000 of the death benefit. You can accelerate a portion of the policy or the entire amount, based on your needs and the carrier’s guidelines.
Later in the post, we would demonstrate how much Matt and Steve could receive from the $100,000 they filed against.
Having the policy in place and having access to the living benefits, has allowed Matt and Steve to survive financially, what Matt physically went though.
The accelerated benefit riders allow the insured to have more comprehensive coverage and address several needs for insurance. It is no secret that as humans when we are presented with several options it’s easy to get overwhelmed and do nothing. This could be financially devastating to the people close to us. Having 1 policy that can address multiple needs is not only simple, but it could be cost-efficient as well.
Probably, you have several questions as to how exactly this works, who will receive the money, is it expensive and etc. We would answer some of the most common questions when it comes to accelerated benefit riders below. If you need additional information or would like us to take a closer look at your personal situation, simply reach out to us.
Most Frequent Questions About Life Insurance with Living Benefits:
Q: Is this considered a loan?
A: No, the proceeds payable from accelerated benefit riders are not considered a loan and they do not have to be paid back.
Q: Are the money paid in a lump sum or installments?
A: Most policies pay the benefit in a lump sum.
Q: Are living benefits available with every company?
A: No, not every company offers accelerated benefit riders. Furthermore, not all accelerated benefit riders are the same. In other words, even though a company may offer living benefits, it may not be as comprehensive as other carriers. Therefore, it is essential to work with an advisor who specializes in life insurance with living benefits to ensure that you are matched with the right carrier for you.
Q: Are policies with living benefits more expensive than a policy without living benefits?
A: Not necessarily. Carriers offering these riders also understand that they need to be competitive and in many instances, their prices are in line with carriers that do not offer these benefits.
Going back to the example above. Matt was 40 when he purchased the policy with living benefits. As we mentioned, he was in good health and he does not smoke.
Below are the rates with Company A (the lowest cost option without living benefits) and Company B (coverage with living benefits). Both are for $500,000 term insurance locked in a 20-year term at preferred health.
Company A/ No living benefits: $500,000- 20 year term – $36.33 per month
Company B/ With living benefits: $500,000 – 20 year term – $38.45 per month
The difference is less than 1% or $2.02 per month to be exact! If given the option between both policies, it makes financial sense to apply for the carrier offering the rider.
Q: Are living benefits the same as cash value?
A: No, they are not. Living benefits are available in a term as well as in permanent life insurance.
Q: How do you file a claim and access the riders?
A: The process of filing a claim and accessing the living benefits could vary amongst the different carriers. However, it typically follows the next steps.
If the proposed insured is diagnosed with a qualifying medical condition, the owner could contact the company and file a claim to accelerate the death benefit.
The carrier would send out a claim form that needs to be completed. Afterward, they will assess the insured’s health and reach out to his or her doctor to get a copy of the complete medical history. Once they assess the information, they will make an offer.
Per our example, Matt wants to accelerate $100,000 of his life insurance death benefit. After reviewing the information and seeing how the condition has affected the insured’s life expectancy, the company may make an offer of $50,000. In this case, if Matt and Steve accept the offer, the carrier will send a check for $50,000 minus any administrative/processing fee (typically around $500 or less). In other words, they would receive a payment of $49,500 and “give up” $100,000 of the future death benefit.
This is just an example of a possible scenario. Every situation is different and we are not able to make any guarantees.
Q: Are the benefits received under accelerated benefit rider taxable?
A: Benefits received under accelerated benefit riders from life insurance are designed to receive favorable tax treatment. However, every situation is different and we would advise you to seek advice from a professional tax advisor.
Business owners have many responsibilities. Having a peace of mind that they have protection not only in case they pass away but in case they experience a major health event, could be the difference between having the ability to continue their business or shut it down. Life insurance with living benefits provides protection not only in the event of someone passing away but also when life happens. It is crucial to talk with an advisor and ensure your policy will pay out not only when you die.