When you get a life insurance policy, you may be focused on the coverage you need to meet the needs of your loved ones after you die. But adding living benefits riders to your policy can turn your life insurance policy into financial help while you’re still alive.
What are living benefits riders?
These riders are add-ons to your life insurance policy that allow you to access a portion of your death benefit while you’re still alive or waive your premiums if you meet the rider’s requirements, like not being able to work after a disability.
List of living benefits riders
Each insurer offers a different set of living benefits riders, all with different terms and conditions. But the following are the more popular riders you might find.
Accelerated death benefit rider
This rider allows you to access a portion of your death benefit if you’re diagnosed as terminally ill and are expected to die within a time specified by your policy, such as 12 months.
Most of these riders offer a set percentage of the death benefit you can access, up to a certain dollar amount. For example, your rider may offer up to 60% of your policy or $100,000, whichever is the lower amount. After you die, your family gets whatever money is left over as a death benefit.
Critical illness rider
This rider allows you to access a portion of your death benefit if you’re diagnosed with a terminal or chronic illness that requires ongoing care over time, such as a heart attack or stroke.
The amount you can access is typically a percentage of your death benefit. For example, if your policy is worth $300,000 and your rider offers 60%, you could access up to $180,000 from your death benefit.
With this rider, your life insurance premiums are waived if you are considered totally disabled and can no longer work for a time specified by your policy, such as six months.
What counts as “totally disabled” is specified in your policy, and this rider typically comes with an age limit for qualifying, such as under 65 years old. You start paying your premium again once you go back to work.
Long-term care rider
If you need long-term medical care, whether through home care or in a facility, this rider allows you to receive monthly payments from your death benefit to help pay for it. The benefits can be for temporary care or care that is required for the rest of your life.
These riders pay out in two ways, either as an indemnity, which pays a set benefit amount to the insured, or as a reimbursement, which pays out the exact cost of the care up to the rider’s specified monthly limit.
The total max benefit you receive is usually capped at up to 80% of your death benefit. And you’ll typically have to complete a waiting period before you can receive benefits, such as 90 days.
How much do living benefits riders cost?
Some policies automatically include an accelerated benefits rider for free. The rider generally pays out if you’re expected to die within 12 months and acts as an advance to your death benefit.
Riders that typically aren’t free, such as long-term care or waiver-of-premium riders, increase the cost of your monthly premiums. For example, your rider may cost an additional 25% of your monthly premium. However, the exact cost of your rider depends on your insurer, your age and other underwriting considerations at the time you purchase your policy.
Plus, if you end up using your rider and accepting benefits early, your insurer may charge you a fee, such as a percentage of your payout or a flat fee.
How to get living benefits riders
Typically, you have to sign up for living benefits riders when you purchase your life insurance policy. Even if one or more of these riders is included free with your policy, you need to opt in to which riders you want.
If the insurer does let you sign up later, you may have to prove you don’t already have a serious health condition, and there is usually a waiting period included. For example, you may not be able to use the benefit until a year after the rider was added to the policy.
Compare life insurance with living benefits riders
What to watch out for with living benefits
Before you decide to add these riders to your policy, keep the following in mind.
- May affect other benefits. The money you get from your living benefits riders may keep you from qualifying for certain government benefits, such as Medicaid or other income-based programs. And your benefits are deducted from your death benefit.
- Interest may apply. Some insurers treat accelerated benefits as an advance or loan against your death benefits and may charge you interest for the months between when you take the living benefit and when you die. This can decrease the amount left for your family as a death benefit.
- Some insurers charge fees. Administrative fees can apply to your benefits, either as a flat fee, an amount taken out of each payment you receive or charged against your remaining death benefit.
Are payouts from living benefits riders taxable?
Most living benefits aren’t taxable at the federal level, but some states tax these benefits, so you need to check your state laws. Riders that provide monthly payments, such as chronic illness or long-term care riders, can have a payment limit to avoid taxes. For example, in 2020, the per diem limit on living benefits is $380 per day. Anything exceeding that amount is taxable.
Alternatives to living benefits riders
If you don’t think these riders meet your needs, consider the following alternatives.
- Long-term care insurance. A few insurers offer standalone long-term care insurance policies to help cover expenses that aren’t covered by Medicare. But this kind of coverage can be expensive and acts more like disability insurance, with a set daily payout and a waiting period before your benefits kick in.
- Viatical settlements. If you have a terminal illness and a life insurance policy worth $200,000 or more, you can work with a broker to sell your life insurance policy to a viatical settlement provider for a cash lump sum that is less than the death benefit payout—typically 70% or less. Then, when you die, the death benefit goes to the provider instead of to your beneficiaries. But some states don’t regulate these kinds of settlements, and your broker’s fees can be as much as 30% of your payout.
- Whole life insurance with cash value. If you have a whole life insurance policy that has earned cash value, you can take out a loan against that value. Like any other loan, you have to pay interest. And more importantly, if you don’t pay back the loan, your insurer will take the amount you owe out of the death benefits paid to your beneficiaries.
What is a death benefit rider?
Because the cash value of whole life insurance policies is invested in the market, death benefit riders can be added to protect your policy’s death benefits, despite any market fluctuations or investment losses. This rider usually has just two forms.
- Basic death benefit rider. This rider ensures your death benefit is at least as much as you paid into the policy, minus any funds you take out while you are alive.
- Enhanced death benefit rider. With this rider, you are guaranteed that your policy’s cash value will either grow at a certain rate or will pay out a death benefit of the highest cash value the policy was worth.
Living benefit riders can offer one more layer of protection by letting you access a portion of your death benefits while you’re alive. But the fees and benefit structures of the riders vary widely by insurer, so you may want to compare life insurance companies to make sure you get the coverage that works best for you.