A:Answer A living benefit rider¹ is a general industry term for any rider on a life insurance policy that may allow for part of a life insurance policy’s death benefit to be paid out while you’re still alive if you have a qualifying condition, such as a terminal, critical or chronic illness. 

While the main purpose of a life insurance policy is to provide a benefit to your loved ones when you pass away, being able to access benefits while you’re alive may be an important feature for you. Permanent policies may also allow for access to the accumulated cash value in the policy through loans or partial surrenders which are described in more detail below. Keep in mind, benefits on a life insurance policy can vary, depending on the type of policy. 

Both term and permanent life insurance, such as whole life insurance, offer “riders” that could potentially provide payments while you’re alive. (Riders are additions to the life insurance contract that allow you to customize your policy.) 

For example, you could purchase a chronic illness rider, which may pay a benefit if a covered illness limits your day-to-day abilities. A terminal illness rider could also allow you to access a portion of the policy’s death benefit before you pass if you meet certain conditions.  

If you choose permanent life insurance, there can be several benefits available to you while you’re still living. For example, in universal life policies (a type of permanent life insurance), premium payments above the cost of insurance can accumulate as a cash value² and grow, generally income tax deferred³. You can borrow from this account — again, generally income tax free⁴ — for personal expenses, whether it’s for a new roof or long-term healthcare, as long as your policy remains in force.⁵ The accumulated cash value can also be used to pay your policy costs for a period of time. It depends on the details of your policy and how you want your policy to work for you.

Your local Farmers agent can help you understand your options for how to fund and structure a life insurance policy to align with your goals. A little planning now can go a long way toward a gentle landing in the future.

1. “NAIC WORD OF THE WEEK - LIVING BENEFITS RIDER” 
   
   
2. Cash values may be accessible through policy loans or partial surrenders. Policy loans that are not repaid and partial surrenders will reduce cash surrender value and death benefit. Policy loans are subject to interest charges. If your policy is a modified endowment contract, loans and surrenders may incur taxes and penalties.
   
   
3. Farmers^® companies, employees, agents, and representatives do not provide legal or tax advice. In general, partial or full surrenders from a permanent life insurance policy in excess of the policy’s basis are taxable. Limited circumstances exist where death proceeds will be taxable. This material has been prepared for general informational purposes only, and is not intended to provide and should not be relied on for tax, legal or financial advice. Because each individual’s situation is different, specific advice should be tailored to your particular circumstances; you should always consult your own tax, legal and other advisors before engaging in any transaction. This material reflects our general understanding of current law as of the date hereof, but tax laws and IRS administrative positions may change. This material is not intended to and cannot be used to avoid any Internal Revenue Service penalties. We specifically disclaim any liability resulting from the use or application of information contained in this publication. Farmers New World Life Insurance Company is not affiliated with or endorsed by any government agency.
   
   
4. Distributions from a life insurance policy in the character of partial or full surrenders up to basis or policy loans will generally be income tax free, provided the policy does not violate Modified Endowment Contract (MEC) guidelines and the policy is not terminated during the lifetime of the insured.  MEC guidelines are rules in the Internal Revenue Code which specify maximum premiums that can be paid without triggering adverse tax consequences for surrenders. A policy termination during the life of the insured can cause the owner a single taxable event for any gains in the policy that were borrowed or withdrawn on or before the termination date.
   
   
5. Lifetime coverage (or life of the policy) is guaranteed as long as all premiums are paid to keep the policy in force.

Written by

Curtis Corrado

The information contained in this page is provided for general informational purposes only. The information is provided by Farmers^® and while we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this article or the information, products, services or related graphics, if any, contained in this article for any purpose. The information is not meant as professional or expert advice, and any reliance you place on such information is therefore strictly at your own risk.

FQA.09      06-24

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