Life Insurance: It’s Actually About You
January 8, 2017
That’s right, life insurance is really about benefiting you. Unless you really know a thing or two about life insurance you’re probably inclined to think that you buy it and will personally never see any of the proceeds. But we want to clear up that misconception and quickly show a few of the living benefits that life insurance can provide.
There are a lot of benefits that you can take advantage of when you are still living. Although the face value of a life insurance policy is often referred to as the “death benefit”, there are a lot of ways that this amount can be used while you’re still around.
Most of these benefits center around medical and health related issues. It’s easy to think that a severe medical issue may never happen to us but in reality:
- 1 out of 2 adults will have at least 1 chronic illness
- 2008 Census Bureau
- 1 out of 2 men and 1 out of 3 women will develop cancer in their lifetime
- American Cancer Society. Lifetime Risk of Developing or Dying from Cancer, 2014.
- 1 out of 2 households that have filed for bankruptcy were due to medical problems.
- Health Affairs – Medical Bankruptcy: Myth versus Fact-February 2016
Life insurance can be used as a life raft when you need financial help the most. There are several situations in which you can access the face value of the policy to help you and your family financially:
Those who are diagnosed with a chronic illness such as Alzheimer’s or Parkinson’s can take advantage of their life insurance policy’s death benefit. Plans vary, but generally a policy holder can access up to 90% of the policy’s face value (i.e. death benefit) by being issued tax-free monthly payments to assist with the financial management of their condition. To qualify for chronic illness payments, you must be unable to perform 2 of the 6 Activities of Daily Living (eating, bathing, dressing, toileting, transferring (walking) and continence) or have severe cognitive impairment.
Anyone with a short-term, critical illness can also take advantage of the policy’s face value. Situations such as a coma, severe burns, Cystic Fibrosis, cardiac arrest, cancer, organ-transplant, etc. can qualify for accelerated benefits in the same way as the chronic illness.
If you are disabled and are unable to perform the functions of your job, your life insurance policy can be used to provide a fixed monthly benefit for a period of time. This is generally subject to an age range, waiting period, and maximum payout amounts, but can provide financial assistance when you are unable to return to work.
At some point in their lives, most Americans will require long-term care. Paying for this care can be a significant financial burden and most people can’t afford a dedicated long-term care insurance plan. Long-term care is also not covered by Medicare so the expense is shouldered by you. Rather than relying on Medicaid or using Social Security payments or retirement funds, life insurance can be used to pay for a significant portion of LTC.
Cash Value Growth
This is a hugely overlooked and misunderstood area of life insurance. We’re going to go deep into this and explain the details in a later blog post, but we’ll give you some of the idea here.
Whole life, universal life, and variable life are all types of life insurance that are able to build up a cash value in addition to the face value. When you make a monthly payment, a portion of that is deducted to pay for the face value and administrative fees. The rest is deposited into a cash-value account. This account grows over time due to the additional payments as well as any interest and/or dividends paid by the life insurance company.
Plans differ depending on their type, but whole life and universal life policies will pay an interest rate on the amount of the cash value for the life of the policy. This will steadily and safely grow over time and you will have access to this cash component to use as you see fit.
This cash can be used for emergencies, vacations, college, and can even be accessed via a tax-free loan to provide supplemental income during retirement.
Don’t underestimate the power of compound interest – it can give your 401(k) or investment accounts a serious run for their money. The interest rates can also be very attractive – right now we have plans that are paying out 5.85% (and have never paid less than 5.7%). Try walking into your bank and asking for a CD with that rate – you’ll probably be escorted out of the building.
There are a huge variety of riders and options that can be added to a life insurance policy that provide living benefits. Some of our providers even offer complimentary perks such as:
- Orphan Benefits: Monthly payments per child in the event of the death of you and your spouse.
- Orphan Scholarships: Provides the children of the deceased with a renewable higher learning scholarship of up to $6,000 per year for up to four years.
- Legal Assistance: Discounted costs on consulting with a local legal professional for a variety of issues including wills, estate planning, home ownership and family law.