Living Benefits in IUL

When most people think about life insurance, they picture one thing: money that goes to beneficiaries after you die. But what if your life insurance could actually help you while you’re still alive? That’s exactly what living benefits in Indexed Universal Life (IUL) insurance provide.

Living benefits transform life insurance from a single-purpose financial tool into a multi-functional asset that can serve you throughout your lifetime. They allow you to access your policy’s value or benefits during specific life circumstances—not just at death. This can include tapping into cash value for retirement income, accessing death benefits early during critical illness, or using your policy to cover long-term care expenses.

This dual-purpose nature makes IUL particularly attractive for people who want comprehensive financial protection. You’re not just buying insurance that pays when you die—you’re creating a financial resource that can support you through various life stages and challenges.

Understanding living benefits helps you see IUL as more than insurance. It’s a flexible financial tool that protects your family if you die, but also protects you if you face serious illness, need long-term care, or want supplemental retirement income. That’s a lot of value from a single policy.

Summary

Living benefits in IUL policies provide access to policy value or benefits during the policyholder’s lifetime, not just at death. Key living benefits include cash value accumulation that can be accessed through withdrawals or loans for any purpose, accelerated death benefits that provide early access to death benefits during terminal, chronic, or critical illness, long-term care benefits covering extended care needs, and chronic illness benefits addressing ongoing health conditions. These benefits serve multiple purposes: supplementing retirement income, covering medical expenses, funding long-term care, bridging income gaps, or handling emergencies. Unlike death benefits that only help beneficiaries, living benefits protect policyholders during health crises or financial needs. Accessing living benefits through loans generally avoids taxation, though withdrawals and accelerated benefits have specific tax treatments. The trade-off is that using living benefits reduces death benefits available to beneficiaries. Effective use requires understanding when and how to access benefits, tax implications, and balancing current needs against legacy goals.

Cash Value: Your Accessible Asset

The most fundamental living benefit in IUL is the cash value that accumulates within your policy—money you can access at any time for any reason.

How cash value grows: When you pay premiums beyond the cost of insurance and fees, the excess goes into your cash value account. This cash value is credited with interest based on the performance of chosen market indexes (like the S&P 500), with downside protection preventing losses during market declines and caps limiting gains during strong markets. Over time, this tax-deferred growth can build substantial cash value.

Accessing through policy loans: The most common way to access cash value is through loans against your policy. You’re essentially borrowing your own money, using the cash value as collateral. Policy loans typically aren’t taxable events as long as the policy remains in force, making them attractive for accessing funds without triggering income taxes. Interest is charged on loans, but you’re paying interest to yourself (in a sense), and the loaned amount continues earning index credits in many policies.

Accessing through withdrawals: You can also withdraw cash value directly. Withdrawals up to your basis (total premiums paid) are typically tax-free, as you’re recovering your own after-tax contributions. Withdrawals beyond your basis are taxable as ordinary income. Unlike loans, withdrawals permanently reduce your cash value and death benefit.

Common uses for cash value:

– Supplementing retirement income without triggering taxes like traditional retirement account withdrawals

– Funding major purchases like homes, vehicles, or education

– Covering emergencies without depleting other savings or using high-interest credit

– Bridging income gaps during job transitions or business downturns

– Starting or expanding businesses

– Taking advantage of investment opportunities

The flexibility factor: Unlike retirement accounts with age restrictions and penalties for early access, or CDs with withdrawal penalties, IUL cash value is accessible whenever you need it without government-imposed restrictions. This flexibility makes it valuable for both planned uses like retirement income and unexpected needs like medical expenses.

The key is balancing current access with long-term goals. Excessive withdrawals or loans reduce death benefits and can even threaten policy sustainability if they deplete cash value needed to cover ongoing insurance costs.

Accelerated Death Benefits for Critical Illness

Accelerated death benefit riders allow you to access a portion of your death benefit before death when diagnosed with critical illnesses—transforming your policy from death-only protection to living crisis protection.

Critical illness coverage provides lump-sum payments upon diagnosis of specified serious conditions. Common covered conditions include heart attack, stroke, cancer, organ transplant, kidney failure, paralysis, major organ failure, and sometimes others depending on the policy. If you’re diagnosed with a covered condition, you can typically access 25-90% of your death benefit immediately.

How the benefit works: After diagnosis and claim approval, the insurance company advances a portion of your death benefit as a lump sum. This money is yours to use however you see fit—it’s not restricted to medical expenses. The advanced amount reduces the death benefit available to your beneficiaries when you eventually die.

Practical uses during critical illness:

– Covering medical treatments, especially those not fully covered by health insurance

– Trying experimental or alternative treatments

– Traveling for specialized care at top medical facilities

– Replacing lost income while recovering and unable to work

– Modifying your home for accessibility needs

– Reducing financial stress so you can focus on recovery

– Paying off debts to relieve financial burden during illness

Tax treatment: Accelerated death benefits for critical illness may be taxable depending on how the benefit is structured and whether it meets IRS requirements for tax-free treatment. Benefits for terminal illness (life expectancy of 24 months or less) are typically tax-free. Critical illness benefits’ tax treatment varies, so clarify this with your insurer.

The peace of mind factor: Knowing you have access to substantial funds if you face a critical illness provides psychological comfort beyond the financial value. Many people never use this benefit, but having it available reduces anxiety about “what if” scenarios.

Critical illness benefits essentially provide self-funded crisis protection—instead of buying separate critical illness insurance, you’re using your own death benefit to cover living crises.

Long-Term Care and Chronic Illness Benefits

Long-term care (LTC) and chronic illness benefits address one of retirement’s biggest financial threats: the cost of extended care services.

Chronic illness benefits activate when you’re unable to perform a specified number of activities of daily living (ADLs)—typically 2 of 6, including bathing, dressing, eating, toileting, continence, and transferring. Alternatively, severe cognitive impairment can also trigger benefits. Once qualified, you receive monthly payments (often 2-4% of your death benefit per month) to cover care costs.

Qualified long-term care services covered by these benefits include nursing home care, assisted living facilities, home healthcare, adult day care, and hospice care. The monthly benefit can be used for any of these services based on your needs and preferences.

The insurance hybrid advantage: Traditional long-term care insurance has a major drawback—if you never need care, you’ve paid premiums for decades and get nothing back. IUL policies with LTC riders solve this problem. If you need long-term care, the benefit pays for it. If you never need care, the full death benefit passes to your beneficiaries. You’re protected either way.

Example scenario: Suppose you have a $500,000 IUL policy with an LTC rider that pays 2% monthly of the death benefit. If you need long-term care, you’d receive $10,000 monthly ($500,000 × 0.02). If you use benefits for 3 years (36 months), you’d receive $360,000 for care. Upon your death, beneficiaries would receive the remaining $140,000 death benefit. If you never need care, beneficiaries receive the full $500,000.

Cost considerations: Some insurers include basic LTC riders at no additional cost, while enhanced riders with better terms or higher benefit percentages carry charges that reduce cash value accumulation. Evaluate the cost versus the substantial protection provided.

Tax advantages: Benefits received for qualified long-term care are generally tax-free up to specified per-day limits (adjusted annually), similar to traditional LTC insurance. This tax treatment makes benefits more valuable than taxable income of equivalent amounts.

For middle-income individuals especially, LTC benefits in IUL provide crucial protection against care costs that could otherwise devastate retirement savings while maintaining legacy benefits if care isn’t needed.

Terminal Illness Benefits

Terminal illness riders provide access to death benefits when you’re diagnosed with a terminal condition and have limited life expectancy—typically 24 months or less.

How it works: Upon diagnosis of a terminal condition with prognosis of 12-24 months or less (specific timeframe varies by policy), you can access a substantial portion of your death benefit—often 50-95%. This advance payment allows you to use funds during your remaining time rather than waiting until death for beneficiaries to receive them.

Common uses during terminal illness:

– Paying for hospice care or comfort-focused treatments

– Settling financial affairs and paying off debts

– Taking final trips or creating lasting memories with family

– Covering living expenses so family members can take time off work to be with you

– Trying experimental treatments not covered by insurance

– Making charitable contributions or gifts to loved ones while alive

– Reducing financial stress during an already devastating time

Tax treatment: Terminal illness accelerated benefits are typically income-tax-free, treated the same as death benefits. This favorable tax treatment ensures maximum funds are available when needed most.

Emotional and financial relief: Beyond the financial support, terminal illness benefits provide dignity and choice during life’s final chapter. Instead of your family struggling financially while you’re still alive, then receiving death benefits after you’re gone, you can address immediate needs and make your own decisions about fund usage.

The trade-off: The amount accessed reduces death benefits paid to beneficiaries after death. If you access $300,000 from a $500,000 policy, beneficiaries receive $200,000. However, most families prefer having resources available during terminal illness to ease the journey rather than maximizing death benefits.

Most IUL policies include terminal illness riders at no additional cost, recognizing that this benefit serves both the policyholder and beneficiaries by reducing financial stress during impossibly difficult times.

Accessing Living Benefits: Methods and Implications

Understanding how to access living benefits and the consequences of doing so helps you make informed decisions about when and how to use them.

Policy loans are the most flexible access method. You borrow against your cash value, with the loan secured by the policy. Interest is charged, but the full cash value typically continues earning index credits. Loans aren’t taxable as long as the policy remains in force. You can repay loans or let them accumulate—they’re deducted from the death benefit when you die. However, excessive loans can cause policy lapse if they grow larger than the cash value, creating potential tax consequences.

Withdrawals permanently remove cash value from the policy. Withdrawals up to basis are tax-free; amounts above basis are taxable. They reduce both cash value and death benefit. Withdrawals are appropriate when you need funds permanently rather than as a loan, but understand they can’t be undone.

Accelerated death benefits require filing claims with medical documentation proving you meet benefit triggers (terminal illness, chronic illness, critical illness). Once approved, benefits are paid as lump sums or monthly payments depending on benefit type. These benefits reduce the death benefit dollar-for-dollar plus any administrative fees.

Surrender involves canceling the policy entirely and receiving the cash value. This is usually a last resort as you lose all insurance protection. If cash value exceeds your basis, the gain is fully taxable. Surrender charges may apply in early policy years, further reducing proceeds.

Impact on death benefit: Any living benefit accessed reduces what beneficiaries receive. This isn’t a flaw—it’s the trade-off for using benefits during life. The policy still provides value; you’re simply shifting when and how it’s used.

Maintaining policy sustainability: Taking withdrawals or loans reduces cash value available to cover ongoing insurance costs. If cash value becomes insufficient, you’ll need to make premium payments or the policy will lapse. Monitor your policy regularly and ensure you’re not depleting it to unsustainable levels.

Strategic Uses of Living Benefits

Living benefits are most valuable when used strategically as part of comprehensive financial planning.

Retirement income strategy: Many people use IUL cash value to supplement retirement income, taking tax-free loans during retirement years. This provides income without increasing taxable income (which affects Social Security taxation and Medicare premiums) and without depleting traditional retirement accounts. This strategy requires adequate cash value accumulation during working years through consistent premium payments.

Emergency fund alternative: Cash value serves as an alternative emergency fund that’s accessible but not too accessible (avoiding temptation to use it frivolously). It grows tax-deferred until needed, potentially outperforming traditional savings accounts over time.

Healthcare cost coverage: In retirement, healthcare costs represent major expenses. Living benefits provide resources for medical expenses, long-term care, or chronic illness costs that would otherwise deplete retirement savings or burden family members.

Business applications: Business owners use cash value for business needs—covering temporary cash flow gaps, funding expansion, or taking advantage of opportunities. This provides flexible capital without traditional loan applications or equity dilution.

Estate planning enhancement: Living benefits don’t reduce the policy’s estate planning value—they shift it. Instead of passing a large death benefit later, you might use some benefits during life for care or expenses while still leaving a remaining death benefit for heirs.

Generational wealth transfer: Some people deliberately overfund IUL policies, build substantial cash value, use it throughout retirement, and still pass death benefits to heirs—essentially creating a multi-generational financial asset.

The key to maximizing living benefits is viewing your IUL policy as a long-term financial tool with multiple uses across different life stages rather than single-purpose death benefit insurance.

Tax Advantages of Living Benefits

One of the most compelling aspects of IUL living benefits is favorable tax treatment that amplifies their value.

Tax-deferred growth: Cash value grows without annual taxation on gains. Unlike taxable investment accounts where you pay taxes yearly on dividends, interest, and capital gains, IUL cash value compounds without tax drag, accelerating accumulation.

Tax-free loans: Policy loans aren’t taxable events as long as the policy stays in force. This allows accessing substantial funds without triggering income taxes—a huge advantage for retirement income or emergency needs.

Tax-free terminal and chronic illness benefits: Accelerated death benefits for terminal illness and qualified chronic illness are typically income-tax-free, ensuring maximum funds are available during crises.

Withdrawals up to basis are tax-free: You can withdraw premiums you’ve paid without taxation since you’re recovering after-tax contributions.

Income-tax-free death benefits: Remaining death benefits pass to beneficiaries free of income tax, regardless of how much the policy has grown.

No required minimum distributions: Unlike IRAs and 401(k)s that require distributions starting at age 73, IUL policies have no forced distributions. You access cash value on your schedule based on your needs, not IRS requirements.

These tax advantages make IUL living benefits particularly valuable for high-income individuals in elevated tax brackets and for retirees seeking tax-efficient income sources. You can book a free strategy session with us. We will be glad to help,you set up a policy and to help you make the most of it to achieve your aims and objectives.

Conclusion

Living benefits transform IUL from simple death protection into comprehensive financial protection spanning your entire lifetime. They provide resources during critical illnesses, long-term care needs, and retirement while still maintaining death benefits for your loved ones.

This versatility makes IUL appealing for people who want their financial tools to work harder. Instead of needing separate products for life insurance, long-term care insurance, critical illness coverage, and supplemental retirement savings, one well-structured IUL policy can serve multiple purposes.

The key is understanding that living benefits aren’t “free”—they’re features you pay for through premiums and they reduce death benefits when used. But for many people, the ability to access benefits during life when they might desperately need them is more valuable than maximizing death benefits that only help after they’re gone.

If you’re considering IUL or already own a policy, take time to understand your available living benefits, how to access them, and how they fit into your broader financial plan. These benefits can provide crucial support during life’s most challenging moments while still protecting your family’s future.

Living benefits represent life insurance evolved beyond its original purpose—not just protecting against death, but protecting you throughout life. Life Insurance(IUL) policies have a lot of features that can potentially provide a safety net for you and for your loved ones. You should check out this video on how to safeguard your future and that of your loved ones against unforseen circumstances like job loss or illnesses.

FAQs

Question 1: Do I pay taxes when I access living benefits?

Answer: It depends on the benefit type and access method. Policy loans are generally tax-free if the policy stays in force. Terminal and chronic illness benefits are typically tax-free. Critical illness benefits may or may not be taxable depending on structure. Withdrawals up to your premium basis are tax-free, but amounts above basis are taxable. Consult a tax professional about your specific situation.

Question 2: Can I access living benefits and still leave a death benefit to my family?

Answer: Yes. Living benefits reduce but don’t eliminate death benefits unless you access the entire amount. If you have a $500,000 policy and access $200,000 for long-term care, your beneficiaries still receive $300,000 when you die. The remaining death benefit provides legacy protection even after using living benefits.

Question 3: What happens if I take too many loans and my policy lapses?

Answer: If outstanding loans exceed your cash value and the policy lapses, you face potential “phantom income” taxation—owing taxes on the difference between loans and premiums paid, even though you no longer have the policy or money. This is a serious risk. Monitor loans carefully and maintain adequate cash value to prevent lapse.

Question 4: Are living benefits included automatically or do I need to add them?

Answer: Basic accelerated death benefit riders for terminal illness are often included at no cost. Chronic illness and long-term care benefits may be included or available as add-on riders, sometimes with additional costs. Critical illness benefits are typically optional riders. Review your policy or discuss with your agent to understand which benefits you have and whether others can be added.

Question 5: How soon can I access cash value after buying an IUL policy?

Answer: You can typically access cash value once it accumulates, but this takes time. In early years, most premiums cover insurance costs and fees, leaving little for cash value. Meaningful cash value usually requires 5-10 years of premium payments. Some policies have surrender charges in early years that reduce cash value if accessed. Plan on IUL being a long-term commitment for living benefits to become substantial.