Life insurance seems like a straight-forward financial product. Insurance companies receive premiums and in exchange they pay out a death benefit to policyholders' beneficiaries. However, these plans can be much more complex than that.
"There are a lot of options – much more than people realize," says Cliff Wilson, chair of the board of directors for Life Happens, a nonprofit that educates the public on insurance matters. Some policy perks are geared toward certain populations, such as the USAA Military Future Insurability Rider, which lets service members convert a military policy upon retirement. But other life insurance perks can be had by virtually anyone.
Here's a look at 10 things you may not realize your life insurance policy could do.
1. Pay for long-term care expenses. Long-term care insurance is expensive, and adding a rider to a life insurance policy can be an effective way to get this coverage. Specialty products that combine life and long-term care insurance are also available. Whether the coverage comes as a rider or a specialty policy, using long-term care benefits typically reduces the amount of the death benefit.
While there is an extra cost for adding long-term care coverage to a life insurance policy, it can be more cost-effective than buying two plans. It can also be a good choice for people who want long-term care insurance, but aren't sure if they will need it. "They are going to get coverage, but they aren't spending money on a policy they aren't going to use," says Jimmy Lee, CEO of The Wealth Consulting Group in Las Vegas.
2. Provide benefits if you're terminally ill. Known as living benefits, this perk comes standard on many term and whole life policies. "Living benefits are under-utilized and very prevalent in the industry," says Greg Riedel, assistant vice president and product line leader of life insurance at USAA. The details vary by plan, but living benefit provisions generally allow those with a life expectancy of 12 months or less to receive a portion of their death benefit in advance.
3. A source of cash if you're disabled. Policyholders don't have to be dying to get their death benefit early from some insurers. Many plans offer chronic illness or critical illness riders that may pay out funds if a person becomes disabled or experiences a heart attack, stroke or invasive cancer, among other things. Wilson notes these options can provide a vital safety net to people who are unable to work and have mounting medical bills. "It's more important to use those funds while [someone's] alive than as a death benefit," Wilson says.
4. Give one last gift to a favorite charity. You could leave the money in your savings account as a bequest to an organization, or you could use some of that cash to buy life insurance and give substantially more. "You can leverage your money for a bigger gift for charity," Lee says. Depending on the policy, your age and health, you may be able to turn small monthly premiums into a large donation.
5. Ride out a bear market. One of the more novel approaches to using permanent life insurance is as a safeguard against a sagging stock market. "It's a bucket of money to use in a bear market," Lee says. "Instead of having to sell stocks and take a loss, take money out of life insurance." This strategy only works with insurance policies that have cash value. Retirees can take a tax-free loan from a policy rather than withdrawing money from retirement funds. Then, when the market rebounds, gains from investments can be used to pay back the loan.
6. Minimize your taxes in retirement. Leveraging loans from a whole life policy isn't just something for bear markets. "[Policyholders] can treat that life insurance as their own personal pension," says Scott Moffitt, president and CEO of Summit Financial Group in Loveland, Ohio. Moffitt specializes in helping his clients work out a strategy of withdrawals and loans that will let them create an ongoing stream of tax-free money in retirement. This system can even be set up so policyholders stop making premium payments, Moffitt says.
7. Insure the life of a child. Although parents can buy an insurance policy specifically for their child, they could also add a rider on their own plan. Many insurers offer child protection riders at a low cost and with flexible coverage levels.
8. Cover a child's college costs. Another way to use life insurance to help a child is to take out loans from a whole life policy for tuition payments. "The guaranteed loan rates [on many policies] are frankly better than the rates for a lot of student loans," Moffitt says. What's more, rather than paying interest to a bank or the government, that money goes back into the policy.
9. Waive your premiums. Premium waiver riders also come standard with many policies, and these provisions can help those who become disabled keep their coverage. As its name suggests, the rider eliminates premiums for those who have a qualifying injury or illness. Like living benefits, premium waivers are seldom used. "Many people don't think about it," Wilson says. "It's explained at the purchase, and they don't think of it [when needed]."
10. Return your money if you don't die. Lastly, you might not realize your life insurance company could return all your premiums if you reach the end of a policy's term and never make a claim. You have to pay extra for a return of premium rider, and it may make more financial sense to invest that money instead. However, some people like knowing they will get all their money back if they end up outliving their life insurance.
The bottom line for life insurance shoppers is to compare more than just the death benefit. Many plans come with valuable extras that could be worth a higher premium. "Don't just shop for a price point," Riedel says. Instead, he advises people to ask themselves, "What are the benefits I'm getting at that price?"