When most people hear the term “life insurance,” they tend to think of the financial support one receives when a loved one passes away.
What often gets overlooked is the value life insurance can create while you’re still living.
Whether helping fund a child’s education, start a new business or reinforce retirement plans, life insurance has the potential to do far more, thanks to what are known as living benefits.
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If this concept is new to you, you’re not alone. A recent study from Prudential Financial revealed that while many Americans consider life insurance essential to their financial strategy, few understand the full scope of its living benefits.
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Notably, nearly 75% of respondents said they were unfamiliar with how life insurance can be used to build generational wealth.
That gap in understanding presents a timely opportunity, especially during Life Insurance Awareness Month, to change perceptions so that life insurance is viewed as an asset that supports long-term financial goals.
What are living benefits?
Living benefits are features built into certain life insurance policies that allow you to access funds or policy value while you’re still alive.
In the right circumstances, they can serve as a flexible resource to help navigate major financial decisions or unexpected challenges.
Let’s take a closer look at how they work:
Cash-value accumulation. Permanent policies such as variable universal life insurance can gradually build cash value, which can be borrowed against or withdrawn, often functioning like a low-interest loan without the hassle of going to a bank.
Add-on benefits. Life insurance isn’t one-size-fits-all, and that’s where riders come in. These optional add-ons let you customize your coverage to fit your lifestyle. Whether it’s accessing funds early during illness or pausing payments during hardship, riders give you flexibility when it matters most.
Tax advantages. The cash value grows on a tax-deferred basis. In many cases, if you withdraw only what you’ve paid in premiums, those funds can be generally accessed tax-free.
Wealth transfer. Life insurance can also be used to pass assets on efficiently from one generation to another. With proper planning, it can help reduce tax burdens for your beneficiaries.
Two paths to living benefits
Understanding the types of life insurance is essential to unlocking living benefits:
Permanent life insurance policies, including variable universal life, provide coverage for your entire life, as long as premiums are paid. Over time, they build cash value that you can use for major expenses such as retirement, medical needs, even business investments.
Think of it like buying a home; it’s more expensive at the start, but it builds real value over time.
Term life insurance policies offer coverage for a set number of years, often 10, 20 or 30. They’re generally more affordable but don’t accumulate cash value.
However, many term policies include features such as accelerated death benefits, which allow you to access a portion of the death benefit if you are diagnosed with a serious illness.
In many ways, term life is more like renting; it’s cost-effective and simple, but with no equity unless you use it during the coverage period.
Key considerations with living benefits
If you’re considering a life insurance policy that includes living benefits, take the time to align the policy with your financial goals and needs.
Here are a few practical ways to evaluate your options:
Start with your goals. Before comparing policies, think about what you want this insurance to do.
- Are you looking for lifelong coverage or just for a specific stage of life?
- Will the living benefits be used for retirement income or unexpected medical costs?
The clearer you are about your goals, the easier it is to choose the right policy.
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Ask about riders. The right rider can make a good policy even more valuable.
For example, Prudential has a rider that allows consumers to access their death benefits early if they’re diagnosed with a chronic or terminal illness. It allows individuals to manage real-life challenges with financial confidence.
A long-term care rider can help cover extended care needs later in life.
Understand the costs. Look closely at any fees for accessing the cash value, penalties for early withdrawals and other administrative charges.
A policy that seems affordable upfront might have hidden costs that affect its value over time.
Evaluate flexibility over time. Your financial needs will evolve, and your policy should be able to keep up.
Make sure the policy you choose offers options to adjust premiums, access funds or add coverage as needed.
The role of financial professionals in supporting you
Another recent study by Prudential found that many Americans feel overwhelmed when trying to understand their life insurance policies. Common sentiments include:
- “How do I make sure I don’t use up my policy too soon?”
- “What does this mean for the final payout?”
- “Wait, life insurance can help with other expenses?”
- “I get lost in the jargon. One explanation contradicts the next.”
A financial adviser can serve as both a guide and educator, helping to demystify these complexities and inform your decisions. Consider asking:
How does the cash value work, and when can it be accessed? Understanding the mechanics and timing of cash value access is critical to long-term planning.
Will using living benefits reduce the death benefit? In some cases, accessing funds now could reduce the amount available to beneficiaries later. In others, it might not.
How does this policy integrate with your broader financial strategy? Life insurance should be an active component of your financial plan, supporting your goals such as preparing for retirement and passing on wealth from one generation to another.
Life insurance is not just about protecting your family after you are gone. When designed and used effectively, life insurance can be an essential part of your financial strategy.
You need to be proactive and make your policy work just as hard for you as you do for your loved ones.
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