As one of the most popular insurance types in the United States, life insurance is an industry currently manned by over 850 companies. Although this is nowhere near the number of entities that work in the car or health insurance market, it still places towards the top of all business sectors when ranked by revenues.
The actual meaning and purpose of life insurance policies are quite clear to anyone who has ever dealt with any form of coverage. It is a way to financially secure loved ones, for some time at least, in case of an unexpected or untimely death. The idea that it operates is based on monthly or annual payments to a life insurance company who will then give hefty payouts to the beneficiaries when the policyholder dies. And while this concept is relatively popular, there are some aspects of life insurance policies that are a bit more complex. One of them would be the so-called “living benefits” section in many policies that have become popular over the past few decades.
Living Benefits: A Basic Overview
According to an Investment Adviser Representative (IAR) and Accredited Investment Fiduciary (AIF) who handles over $40 million in personal assets, Tyler N Westcott, living benefits are counterintuitive because of their timing. Namely, whenever a life insurance policy is paid out to the beneficiaries, it implies that the holder passed away. With living benefits, however, there is no death, and the actual holder becomes the beneficiary. They get to withdraw a portion of the proceeds that would typically be inaccessible until death.
Why Companies Offer Living Benefits
The reason why companies offer living benefits is the same as their underlying reason for existence, to make a profit. Even though the living benefits will make it harder to maintain profitability ratios, it allows companies to charge a plethora of new fees. They can also reduce the final proceeds paid upon death for every single dollar withdrawn as a living benefit by the policyholder. Doing so keeps their overall cash inflows and outflows fairly balanced when immaterial differences due to the time value of money are not considered. Not to mention the higher prices that most insurance policies with living benefits carry.
Who Can Use Living Benefits?
Tyler Westcott stresses the importance of understanding when any living benefit clause will become applicable. Almost every policy in the market will demand an extenuating circumstance or some form of an unforeseen event to trigger a living benefit. Most common examples include sudden onsets of incurable diseases or life-threatening injuries. If the policyholder undergoes either one of those two scenarios, they may need to tap into the living benefits to pay for their medical treatment that goes outside of their existing health coverage.
The Purpose of Living Benefits
Based on those mentioned above, the ultimate purpose of using any portion of the living benefits is to help mitigate hefty expenditures in critical situations. So, someone who finds themselves unable to pay for the treatment needed to save or prolong their life will usually qualify. Many companies even allow policyholders to leverage money from their living benefits to pay for things such as around-the-clock medical care, nursing homes, and similar. Things that will practically never be allowed, however, are random expenditures such as vacations, asset purchases, and other elective costs.
Since there are extensive tax implications related to various forms of retirement plans, it is reasonable to expect the living benefits to be the same way. After all, being able to use money from a fund that has been developed by the policyholder over the years is the definition of both living benefits and retirement plans.
Because of this, most individuals get surprised to learn that there are no federal income taxes imposed on living benefits. Ever since January of 1997, people who received accelerated death penalties, which are now recognized as living benefits, have not had to pay any tax on the federal level. The same does not apply to all 50 states, unfortunately, as some of them still impose state-level taxes on early withdrawals.
Fees Upon Using the Living Benefits
The final piece of information needed to comprehend the living benefits are the fees associated with them. According to Farmington resident Tyler N Westcott, there are a few different ways in which companies charge people. The most common one is a flat, percentage-based fee calculated directly from the amount withdrawn. That fee is then taken out of the remaining funds in their cumulative, after-death proceeds. In other words, the individuals getting their living benefits will rarely have any out-of-pocket expenses. Most of those costs will be passed on to the beneficiaries who will receive less upon the policyholder’s death.