If you lose your health or your job, your life insurance may ride to the rescue. Here are 6 benefits you might not know you have (or might want to add to your policy).
Life insurance is usually straightforward: Pay your premiums and your beneficiaries get the benefit when you die. But life insurance also can be used in ways you may not expect:
1. Life insurance could come to the rescue if you have a terminal illness.
If you are diagnosed with a terminal illness, you may be able to tap into your policy benefits right away to help pay for medical bills or other immediate expenses. These "accelerated death benefits," also called "living benefits," may have been automatically included in your policy, or you may want to add them as a rider. Contact your insurance agent to see whether you have this option.
2. You may be able to convert your term life or group life policy to a permanent life insurance policy.
Most term life and group life policies allow you to convert your policy into an individual permanent life insurance policy, without undergoing an additional medical exam. (You'll pay higher premiums for the permanent life policy.) This can be invaluable if you are diagnosed with a severe medical condition and you want to ensure continued life insurance coverage when your term policy runs out, or if you leave your job and lose your group life benefits.
3. You can use your permanent policy to rescue yourself from financial disaster.
In a time of financial crisis when you need cash, you may think first of emptying your savings account, cashing in your stocks, taking out loans and even gutting your 401(k). Cash value that has built up within a permanent policy might be easily forgotten. Yet cash value's purpose is to come to the rescue in these moments.
"Where else can you go to borrow money where there's no collateral required and no proof of income needed?" says Jack Dewald, a life insurance agent and the board chairman of the Life and Health Insurance Foundation for Education. "Your life insurance policy can be a lifeline to you for cash and loans, especially in a down economic time. For example, you use cash value in life insurance before your house gets foreclosed."
4. Your policy may pay for your long-term care.
Many life insurance companies are inventing policies that can be used in a number of ways depending on your situation. Growing in popularity is the long-term-care rider, which you may have added at the time you bought your policy. (If you didn't, see "No long-term-care insurance? Uh-oh.") Long-term-care riders allow you to take immediate payouts to pay for your assisted-living facility or nursing home. Your death benefit is reduced by the amount you take out.
5. Your policy may pay its own premiums if you can't.
Who will pay your life insurance premiums if you're unable to work because of disability or serious illnesses? You can often choose to have your policy pay its own way in that case. By adding a "waiver of premium" rider when you buy your policy, you can ensure that you won't have to continue premium payments if you're out of work for a certain length of time (such as six months) and for certain reasons (like disability). Waiver rules vary by company. (Also see "Disability insurance can save your life.")
6. You may be able to turn your spouse's insurance into your own policy when he or she dies.
In addition to long-term-care coverage, life insurance riders offer a panoply of options. Among helpful riders is one available from New York Life Insurance called the "Spouse's Paid-Up Insurance Purchase Option," automatically attached to most New York Life permanent policies.
This rider is useful when one spouse is "uninsurable": He can convert the death benefit of his spouse's policy into a paid-up policy on himself, thus giving himself coverage that he otherwise couldn't buy.
Insurance agent Bob Arensberg recently helped a couple use a life insurance policy in ways they didn't expect. A California client bought a New York Life policy for $750,000 from him in 2002, but her husband was not able to get a similar policy because of a serious back injury. Arensberg's client was later diagnosed with cancer. Before her death in 2007 at age 42, she exercised an accelerated death benefit to access some of her policy benefit in order to buy land and build a house to leave for her husband and two children.
In addition, after his client's death, Arensberg mentioned the insurance-purchase rider to her husband, who had not been aware it existed. He was able to convert the remainder of his late wife's policy into a paid-up policy on himself.
"Be alert to the value of working with your agent," advises Gary Dworkin, the chairman of the National Association of Independent Life Brokerage Agencies. "Let them review your policies every year. Ask questions."