What is considered a living benefit option in life insurance?

A sudden death can place financial stress on those who depend on you. If this happens, life cover can help them pay the bills and other living expenses.

What is life cover

Life cover is also called 'term life insurance' or 'death cover'. It pays a lump sum amount of money when you die. The money goes to the people you nominate as beneficiaries on the policy. If you haven't named a beneficiary, the super trustee or your estate decides where the money goes.

Life cover may also come with terminal illness cover. This pays a lump sum if you're diagnosed with a terminal illness with a limited life expectancy.

Accidental death insurance is different from life cover. It will only pay out if you die from an accident. It will not provide cover if you die from an illness, disease or suicide. This type of cover often has a lot of exclusions.

To understand what's covered under a policy and the exclusions, read the product disclosure statement (PDS).

Decide if you need life cover

If you have a partner or dependents, life insurance can help repay debt and cover living costs if you die.

If you don’t have a partner, or people who depend on you financially, you may not need life cover. But consider getting trauma insurance, income protection insurance or total and permanent disability (TPD) insurance in case you get sick or injured.

How much life cover you might need

To decide how much life cover to get, consider how much money you or your family would:

• need — to pay the mortgage, credit cards and any other debts, child care, school fees and ongoing living expenses
• receive — from super, savings, the sale of any investments, your paid leave balance, and support from your extended family

The difference between these is the amount of cover you should get.

If you need help deciding if you need life cover, and how much, speak to a financial adviser.

How to buy life cover

Check if you already hold life insurance through super. Most super funds offer default life cover that's cheaper than buying it directly. You can increase your level of cover through your super fund if you need to.

You can also buy life cover from:

• a financial adviser
• an insurance broker
• an insurance company

Life cover can be bought on its own or packaged with trauma, TPD or income protection insurance. If it's packaged, your life cover may be reduced by any amount paid on other claims in the package. Check the PDS or ask your insurer.

Life cover premiums

You can generally choose to pay for life cover with either:

• stepped premiums — recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
• level premiums — charge a higher premium at the start of the policy, but changes to cost aren't based on your age so increases happen more slowly over time

Your choice of stepped or level premiums has a large impact on how much your premiums will cost now and in the future.

Compare life cover

Once you know how much life cover you need, shop around and compare:

• benefits and policy features
• exclusions
• waiting periods before you can claim
• limits on cover
• the cost of the premiums — now and in the future

A cheaper policy may have more exclusions, or it may become more expensive in the future. You can find information about the policy on the insurer's website or in the product disclosure statement (PDS).

What you need to tell your insurer

An insurer will ask you questions when you apply for or change your insurance. These questions may be about your: 

• age
• job
• medical history
• family history, such as a history of disease
• lifestyle (for example, if you're a smoker)
• high risk sports or hobbies (such as skydiving)

If an insurer doesn't ask for your medical history, it may mean that the policy has more exclusions or narrower policy definitions.

The information you provide will help the insurer to decide:

• if they should insure you
• how much your premiums will be
• terms and conditions for your policy

It is important that you answer the questions honestly. Providing misleading or incomplete answers could lead an insurer to cancel or vary your cover, or decline a claim you make.

Making a life cover claim

If someone close to you dies and you need to make a claim, or if you need to make a terminal illness claim, see how to make a life insurance claim. 

When people buy life insurance, they generally focus on the death benefits that go to their loved ones. But did you know that some life insurance policies offer “living benefits” that you can tap into while you are alive? These benefits increase the value of your policy by allowing you to access your death benefit in certain situations. In this article, we’ll define what life insurance with living benefits is, how you can use them and why they’re a valuable addition to your life insurance policy. Consider working with a financial advisor as you assess your life insurance needs.

What Is Life Insurance With Living Benefits?

Life insurance is intended to provide financial support for the beneficiaries of someone who passes away. Most people assume that this financial support only happens after death, but some policies provide living benefits.

Living benefits are also known as accelerated death benefits. They are riders attached to a life insurance policy that allows the insured to access a portion of the death benefit while they’re still alive. In most cases, the money withdrawn through living benefits reduces the death benefit available to your beneficiaries upon your death.

Depending upon the insurer and the structure of your life insurance policy, the cost for the living benefits varies. They may be included at no extra charge or you may have to pay an additional fee on top of your monthly or annual premium in order to receive those benefits.

How Can You Use Living Benefits From Life Insurance?

Life insurance with living benefits can provide support to policyholders in many ways. These are a few of the most common living benefit options available from insurance companies:

• Terminal illness. Diagnosed with a terminal illness with a life expectancy of less than 6 to 12 months. Benefits can be used to pay for experimental medicine not covered by insurance, burial expenses or anything else you feel is necessary.

• Chronic illness. When you are diagnosed with a chronic illness that prevents you from performing two of the six basic activities on your own. Known as activities of daily living, they are bathing, dressing, eating, continence, toileting, transferring or due to cognitive impairment.

• Critical illness. An illness that has a substantial impact on your well-being, but does not necessarily lead to death. Illnesses include cancer, heart attack, stroke, blindness due to diabetes or kidney failure. Benefits are usually in the form of a lump sum benefit.

• Long-term disability. The inability to perform your job (or any job, depending on the policy terms) to earn an income. This benefit helps to replace your lost income while you cannot work.

• Long-term care. Pays for some or all of the costs of long-term care that your health insurance doesn’t cover. Depending on your policy terms, it could cover in-home care as well as nursing home facilities.

Limitations of Life Insurance With Living Benefits

In order to receive money from your life insurance with living benefits, your claim must be approved by your life insurance company. Each company approaches claims differently and has different qualifications as to who is eligible to receive benefits. In general, here are some of the limitations that you may face when submitting a claim:

• Eligibility. In order to receive living benefits, your insurance company must approve your claim according to eligibility requirements based on the type of disease that you have and your projected life expectancy.

• Claim limits. Insurance companies may limit the amount you can withdraw from your policy as a percentage of your death benefit or a set dollar amount.

• Reduction in death benefit. Any amount that you receive from your living benefits may reduce the amount that your beneficiaries will receive.

• Fees for the claim. Some insurance companies will charge a fee on top of your withdrawal amount. This will further reduce the amount leftover from your death benefit for your beneficiaries.

Is a Life Insurance Policy With Living Benefits a Good Idea?

There’s no right or wrong answer to this question. Accessing your living benefits can help to ease the financial strain when you are sick or disabled. This money may even pay for experimental treatment or other care that could prolong or enhance your life. Many people would agree that this is money well spent.

However, when you submit a claim, the payouts may reduce the amount of money that you had intended for your beneficiaries. Depending on your personal financial situation, this could lead to tough financial choices for your loved ones after you pass away.

The Bottom Line

Man's hands held over paper cutouts of a car, a familiy and a house

Life insurance with living benefits gives you the option to access your death benefit while you’re still alive. There are rules to determine your eligibility and limits on how much you may receive. Each insurance company has its own coverage options, rules and limits, so it pays to review policies carefully before buying life insurance. Having a life insurance professional by your side can help you review how much you need and select the policy that addresses your major concerns.

Life Insurance Tips

• Certain life insurance policies offer both living benefits and a death benefit to your beneficiaries. When calculating how much death benefit to buy, consider how much you may need to withdraw when using your living benefits. Our life insurance calculator can help you determine how much life insurance you may need based on your goals.

• When looking for a life insurance policy with living benefits, it helps to speak with a financial advisor who can share the pros and cons of the options that you’re considering. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

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