How Life Insurance Can Help When You’re Not Healthy

Despite what many people may think, life insurance policies can do so much more than just pay a designated beneficiary a sum of money upon the death of the insured person. More specifically, a life insurance policy—when leveraged correctly—can also help when you’re not healthy. Since knowledge is power, let’s discuss specific benefits you can receive in this respect.

Receive accelerated benefits if you get sick

One way you can protect your loved ones in the event of an untimely serious illness is to add an accelerated death benefit rider to your insurance policy. While most common with respect to permanent life insurance, some insurers also offer them on term policies—sometimes at no extra cost either way.

More specifically, an accelerated death benefit rider is a policy provision that enables you to receive benefits while you’re alive (also sometimes called “living benefits”) but deemed terminally, critically, or chronically ill. These benefits can help offset financial stressors for you and your family. However, as with life insurance withdrawals, know that any benefits paid for these riders will in turn reduce your death benefit payout.

Among different types of accelerated death benefit riders, some of the most common include:

• A terminal illness rider, which allows you to receive a portion of your life insurance death benefit if your documented life expectancy is (typically) two years or less (per a physician’s diagnosis).

• A critical illness rider, which typically covers conditions such as cancer, coronary artery bypass, heart attack, and paralysis—among others—and often triggers when the insured is unable to perform at least two ADLs (activities of daily living). These include bathing, continence, dressing, eating, toileting, and transferring (walking or moving oneself from a bed).

• A chronic illness rider, which allows you to access benefits to mitigate costs associated with chronic conditions. Similar to critical illness, this rider is triggered when the insured is unable to perform at least two of the aforementioned ADLs.

For individuals who need assistance with two or more ADLs, long-term care riders are also available to help pay for related expenses. However, these are often the most expensive riders added to a policy.

That said, an LTC rider is sometimes especially beneficial for those who lack a standalone LTC insurance policy (most Americans, in fact) and when you consider that Medicare doesn’t cover most LTC out-of-pocket expenses. One big advantage an LTC rider has over a standalone LTC policy is that it still pays the death benefit even if you never use the care benefit—whereas standalone policies can feel like wasted money if you never file a claim.

Gain access to cash

Through the cash value accrued in your policy
Retirement isn’t cheap, and related costs will likely only increase as time marches on—especially when you consider rising healthcare costs and the declining buying power of Social Security. Add to that many surprise expenses that often sneak up on retirees, and supplementing your retirement income can easily become a necessity rather than a luxury.

Regardless of your own specific need for additional income, a permanent life insurance policy is one way to supplement your retirement savings since—as we mentioned earlier—these policies typically allow you to build or “accrue” cash value (funded by a portion of your premiums) in addition to your death benefit. Think of a cash value insurance policy as an investment-like savings account that includes a death benefit. One distinct advantage is the ability to make withdrawals from the cash value/savings you’ve built on an as-needed basis to use the money as you wish.

Keep in mind that drawbacks do exist when you make withdrawals, so never take these transactions lightly. For example, any amount withdrawn is deducted from your death benefit (thus leaving less for your loved ones) and tax implications are possible—especially if you dip into any gains (value that exceeds your basis or what you paid in premiums).

You can also borrow against your policy with the same as collateral, but these loans are often subject to interest.

By selling your policy
Another way to gain access to cash through your life insurance policy is to sell your policy—commonly known as a “life settlement.” Life settlements are most commonly transacted via a secondary market, often with a broker or settlement company.

It typically takes around 3 to 4 months to sell a policy, but some experienced companies can put money in your pocket in as little as a week. While a quick cash influx can certainly bring you comfort, you likely won’t get the return you’re looking for—as life settlements are estimated to return only approximately 20-25% of the seller’s original death benefit.

With so much at stake, speak to your financial advisor or a tax law expert to fully grasp whether selling your policy will impact your tax obligations and eligibility for public assistance benefits if you currently receive these: knowing life settlements should only be used in specific situations that dictate the need for the same.

For example, selling a life insurance policy could make sense when the policyholder no longer has a beneficiary or dependents who rely on their income. Another scenario is when a policyholder is over-insured, can’t afford premiums, or has a term policy set to expire (in more than six months) with a conversion rider on the policy. Selling your policy is also sometimes beneficial if you need the money to help pay for health expenses.

As life settlement buyers want to collect the death benefit as quickly as they can, they typically only purchase policies from people aged 65 and older or those with a medical condition (as morbid as that sounds). In fact, the older or more terminally ill you are, the more valuable your policy. To sell your policy, its face value will need to equal or exceed $100,000. Post-sale, the buyer takes over all premiums and receives the death benefit when you pass away.

Universal life insurance and other permanent policies (e.g., whole life) are the best candidates for life settlements. However, you can sell a term life insurance policy for cash provided a permanent life insurance conversion is possible (via a conversion rider).

In sum: how life insurance can help when you aren’t healthy

While none of us want to think about getting older or losing our vitality, we do need to plan for these scenarios. Strategically leveraging a life insurance policy is one impactful tool you can use to help ensure access to necessary funds when you need them most.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All guarantees are based on the claims paying ability of the issuer.