The Value of Living Benefits in Life Insurance

Many individuals own some flavor of death insurance, better known as life insurance. Annual premiums are paid to a life insurance company that ultimately provides a benefit to the beneficiaries at the death of the insured. All life insurance companies and their life insurance products have at least one thing in common: they pay the beneficiary a death benefit at the death of the insured. As long as premiums are current and the policy has not lapsed, death benefits are paid. This has been the hallmark for insurance companies since their creation over 300 years ago.

Now there are products that can provide living benefits in life insurance. Historically insurance products have provided limited living benefits, which are defined as benefits you do not have to die to use. Policy loans, withdrawals, surrenders and advances of the death benefit due to a terminal illness (death expected within a year) have been available as living benefits. If properly designed, these living benefits along with the death benefit, can provide income tax free benefits.

Life insurance is both a wonderful asset and a great investment to own as it provides a leveraged tax advantaged asset at the death of the insured, provides peace of mind to families and businesses, but only minimal living benefits. Life settlements have grown and become an option for many policyholders as it provides market value living benefits for unneeded and unwanted insurance policies. The sale of new life policies continue to decline and the number of policies either surrendering or lapsing continues to grow totaling nine million policies or 6% of all policies owned. Roughly 80% of all term and universal life policies never pay a death benefit. One must ask, are we selling the right products!

As a result of people living longer, many individuals tend to value living benefits as important as the death benefit. Living benefits provide proceeds to the insured for needs while they are alive and often when they need it most. New product designs, such as our “Life for the Living” concept, offer death protection and the ability to accelerate this death benefit, in the insured’s living years, at the time of a chronic illness or long-term care trigger. These designs allow for the income tax free acceleration of the death benefit, to offset the costs related to a chronic illness, while still providing and often paid up death benefit. 

The need for living benefits stem from concerns of outliving assets, becoming a burden on one’s children, inadequate public programs and paying for uninsured medical costs. All of which explains while individuals are looking for a plan that provides in case of early death, but also to help protect them against the costs related to a chronic illness.

Consider the following:
Approximately every 26 seconds, an American suffers a coronary event, and every minute, someone will die from one¹

Every 40 seconds, someone suffers a stroke¹

At age 65, the odds are nearly one in two that you will require nursing home services for at least 2.5 years²

Advisors should seek out life insurance products that cover the total lifetime of the insured as insurance protection needs change over time. New and existing clients should be approached as living benefits must be included in their planning. What a great concept, insurance that recognizes the importance of paying a benefit when the insured needs it most.

 

1.      American Heart Association, American Stroke Association, Heart Disease and Stroke Statistics, 2008 update

2.      Medicare, U.S. Department of Health and Human Services, 2007