If you are having trouble paying bills, there are ways to use your life insurance policy to help. Some require planning ahead, while others can only be used under certain conditions.
An accelerated death benefits rider (ADB) allows you to receive a certain percentage (but not all) of your policy’s value before your death if a terminal illness is diagnosed and verified by a physician. The rider may be called a living benefit or terminal illness rider.
This benefit is usually included in your policy. If offered to you at additional cost when you are buying your policy, you may need to consider the chances of using it. If not, you should still consider adding the rider to your policy when you purchase it.
If you do not add or have the rider when you purchase the policy, there are restrictions on when an ACB rider can be added.
When you develop a terminal illness, adding an ADB rider may be preferable to a viatical or life settlement.
The funds can be used for anything to make your remaining life as comfortable and satisfying as possible.
Unlike viatical or life settlement, your premiums may continue. Depending on the details of your rider, this may be the full premium or a reduced amount based on the payout.
Chronic illness and critical-illness riders are similar to the ADB, but allow access to death benefits if either of these occur.
If you have a policy that accumulates cash value, you can use it for expenses. Cash value grows tax-deferred. Any cash up to the amount you’ve paid into cash value through premiums (your “basis”) can be taken out of a policy tax-free. Any amount above that (i.e. accumulated dividends/earnings) is taxable as income.
Although accumulated slowly, there are different ways you can use cash value if it will not be included in the death benefits. These options are usually determined when creating the policy.
Cash value can be the basis for a loan which is not taxable as income.
Cash value can be withdrawn as you need it.
If you cannot withdraw cash value directly, you will still need a means to exhaust it. Cash value can be lost if not used, so don’t let it accumulate without a plan for it.
Some insurance companies offer a chronic illness rider which allows you to receive a certain percentage of your policy’s value before your death.
Critical-illness riders allow you to receive a certain percentage of your policy’s value before your death. Funds are to cover treatment for illnesses that will limit your life expectancy if not treated, typically within six months.
Conditions may include heart attack/failure, life-threatening cancer, stroke, kidney failure, ALS, coma or paralysis, and other critical conditions specified in the policy. The illness must be diagnosed and verified by a physician.
If you elect to add the rider, consider covering at least the illnesses you are at risk for based on family history, past exposures, and/or medical history.
The money for the payout is taken out of the death benefit and is paid out as a lump sum. When you die your beneficiaries will receive a death benefit, reduced by the amount taken out for medical care.
A long-term care rider allows you to receive a certain percentage of your policy’s death benefit before your death. Funds can be used to help pay for nursing home, assisted living, adult day care center, or in-home care when you require help due to an illness or disability that prevents you from performing at least two of the six activities for daily living listed above.
It is best to purchase the rider before you need it, but not so early that you pay more in premiums than you will get in benefits, usually in your mid 50s to mid 60s. The premiums will be prohibitively higher if you wait until you need long term care.
There are ordinarily two types of long-term care riders:
If your life insurance death benefit is low, your long-term care costs will likely exceed the value of the policy unless covered by your healthcare such as Medicare or Medicaid. Even if you have a large death benefit, these costs not paid by your health insurance could still exceed your benefit if they are extremely high. Although the premiums are much higher than a rider, in these cases you may be better off with a long-term care policy which will cover more long-term care expenses. Choosing between the two is difficult if you do not have knowledge of your expenses.
A life settlement involves selling a life insurance policy through a life settlement broker or a life settlement provider (a company that specializes in this) to an individual or company. In return for the payout, they pay the premiums and get the benefit after your death. The payout is considered taxable income and could make you ineligible for Medicaid and/or public assistance.
These settlements are typically only available with whole/permanent life insurance policies and if you are older and expected to live another five to 10 years, although you usually do not need to be sick to qualify.
The purchasing company is trying to make a profit and the settlements are small compared to the face value of the policy. A life settlement is rarely a good financial option for you and in most cases this should be a last resort.
The payout is determined by many factors such as life-expectancy, type and size of the life insurance policy, and the projected total premium costs.
If considering this option, research brokers and buyers thoroughly and have them obtain offers from multiple companies/buyers to maximize the payout.
You may be able to surrender your whole life or universal life policy to the insurance company and trade your death benefit for the current value of the account, minus surrender fees.
It is the last option to consider if you need cash since it leaves you without life insurance for any future needs. While you may be able to purchase a new life insurance policy later, there will be higher premiums because you will be older and may have developed medical conditions that will further increase the premiums or even make you ineligible for most life insurance.
Viatical settlements are a form of life settlement that can be used with any type of life insurance policy, although the company would not be interested if you had a term life insurance policy that might expire without the ability to convert it into permanent insurance while you are alive.
You must have had the policy for at least two to five years, depending on the laws in your state, and they are only available to you under three circumstances.
Qualification requires an attending physician to write a letter verifying the presence of a terminal illness or incapacitating chronic condition. The company can obtain medical records for an outside consult to contest this or to obtain an accurate prediction of the policyholder’s life expectancy.
If considering this option, thoroughly research viatical settlement companies, brokers, and buyers to be sure they are licensed or registered to legally buy your life insurance policy, if necessary in your state, as well as what the state’s requirements may be. Whether dealing directly with the company or going through a broker make sure you get offers from multiple companies/buyers to maximize the payout.
Like a life settlement, the viatical company will take over premium payments. Since your life expectancy is shorter for a viatical settlement, they will pay less in premiums and, therefore, the settlements are higher than other life settlements — typically 50-70% of the policy value. There may be few situations where it makes sense.
Aside from the pay out, there are many other things to consider.