In an effort to make life insurance policies more appealing and fit more of a family’s financial needs, measuring the risk, insurance companies have included insurance riders that cover terminal illness, critical illness, and chronic illness. The idea being, that the insured may develop an illness that causes great financial stress on a family, which could be covered by their life insurance. Should the person eventually pass away, why not accelerate the benefit a few years and pay something now? The policy rider may or may not be a great benefit.
These accelerated benefits, also known as “living benefits” are defined as follows:
Chronic Illness: an insured is unable to perform two out of six activities of daily living, such as bathing or toileting, walking or transferring to or from a bed or chair.
Critical Illness: an insured is diagnosed with a major illness such as cancer, heart attack or stroke. Terminal Illness: meaning a life expectancy of less than 12-24 months, depending on state limitations.
Acceleration of Benefits and Policy Maximums
These riders give you the option to access your policy benefits prior to death in the event of terminal or other life changing illnesses, when the need for additional funds may be crucial. This can be done either as a partial acceleration, meaning a part of your death benefit may remain in force, or a full acceleration. If you elect full acceleration, your policy will be terminated.
Generally there are limits on these policies, the maximum death benefit available for someone under age 65 is $2,000,000 and the maximum death benefit for those over age 66 is $1,000,000. The living benefit is based on the insurance amount; should you use the living benefit, you will not be paid the total amount of the death benefit.
How it works
If a 45 year old insured male becomes ill, for example with prostate cancer (common cancer for men), this person is insured with a ten year term policy for $1,000,000. The insurance company will look at how long the policy has been in force, age of the insured, type of illness, chance of recovery, policy death benefit, etc., they will look at everything related to this person and their current situation, then the actuaries will perform an analysis and make the insured an offer. This offer may be only a fraction of the total death benefit – maybe only $100,000 or less; or it could be more. Each person and their illness, stage in life, and how long the policy has been on the books are all considered when making the offer to the insured. In the end, it may or may not be worth it to give up the insurance policy for a living benefit.
Some policies state that they will pay up to 60% of the death benefit, some more, but the bottom line is that it all comes down to what the insurance company will offer considering all factors.
Typically, in the case of a terminal illness, the insured will get a higher pay out because it may be a matter of months until the insurance company will have to pay the full death benefit. The great advantage to this type of rider is for someone in business they can use the living benefit to help settle their affairs with their business partner(s) before death, leaving their heir(s) free of such complicated burdens. They may also choose to use some of the funds to travel or engage in other activities before they become too incapacitated by their illness.
While these benefits may be valuable for many people, they do not solve all the problems, nor replace the need for good medical insurance, long-term care insurance, life insurance or disability insurance. If the rider is used, the policy may be terminated and may end the possibility for a person to obtain additional life insurance in the future. The rider is an important extra benefit hopefully not in a position of last resort.