Combining Life Insurance with Living Benefits

Life insurance is a valuable financial tool that provides for loved ones after death. However, policies with living benefits offer additional value by allowing access to funds in the event of a critical, chronic or terminal illness while you’re still living. When considering your life insurance needs, you may be wondering whether to opt for term life insurance or permanent life insurance. Both types of policies have their advantages and disadvantages, which can make choosing between them a daunting task. Read this blog to learn more about their differences. However, pairing term life insurance with living benefits with a permanent life policy that also offers living benefits can provide an effective strategy for many individuals.

This approach balances affordability with a long-term focus, helping to ensure financial protection while keeping premiums manageable.

Understanding term and permanent life insurance with living benefits

Before diving into the strategy, it’s important to understand how term and permanent life insurance with living benefits function.

Term life insurance with living benefits

• Provides coverage for a specific period, like 10, 20 or 30 years.
• Lower premiums compared to permanent life insurance.
• Includes living benefits that allow policyholders to access a portion of the death benefit in the event of a qualifying illness (critical, chronic or terminal).
• Policy expires at the end of the term unless converted or renewed.

Permanent life insurance with living benefits

• Provides lifelong coverage as long as premiums are paid.
• Includes a cash value component that accumulates over time.
• Also features living benefits, similar to term policies, allowing access to funds in case of serious illness.
• Typically has higher premiums, but it builds cash value.

Using term benefits first

This strategy involves combining two policies: one for term life insurance and another for permanent life insurance, both with a living benefits rider. Using the term benefits first involves strategically accessing the living benefits of your term life insurance policy before tapping into your permanent policy. Here’s three reasons this can be beneficial.

1. Immediate financial relief: If you face a serious illness, accessing the living benefits of your term policy can provide immediate financial relief. This can help cover medical expenses, in-home care or other costs without depleting your savings or the cash value of your permanent policy.

2. Preserve permanent policy value: By using the term policy’s living benefits first, you preserve the cash value and death benefit of your permanent policy. This helps ensure that your permanent policy remains intact for future needs, such as supplementing retirement income or leaving a legacy for your heirs.

3. Flexibility and control: This approach gives you greater flexibility and control over your financial resources. You can decide when and how to use the living benefits based on your specific circumstances and financial goals.

How it works

Here’s how pairing term life insurance with living benefits works.

1. Start with term life insurance for maximum immediate coverage

You could start by purchasing a term life insurance policy with living benefits, giving you a higher coverage amount at an affordable premium. For example, you might choose a $500,000 term policy for a 20-year term. If you experience a qualifying illness during that time, you can access a portion of the death benefit through the living benefits feature to help cover medical bills, lost income or other expenses.

2. Maintain a permanent policy for long-term protection

At the same time, you could purchase a permanent life insurance policy with living benefits, with a smaller or equal amount of coverage. This ensures you have some level of lifelong coverage, and because it also includes living benefits, you still have access to those features even after your term policy expires.

3. Use the term policy’s living benefits first

If you face a qualifying illness, you could use the living benefits from your term policy first. This allows you to tap into the larger, more affordable coverage while preserving your permanent policy’s cash value and long-term death benefit. Since term insurance costs less than permanent coverage, this approach helps you maximize the benefits available during the years when your financial obligations (like a mortgage or raising children) are highest.

4. Convert or transition to permanent coverage over time

As your financial situation improves, you have options to increase your long-term protection:

• You could convert all or part of your term policy into permanent life insurance, locking in lifelong coverage without needing to requalify based on your health.
• Even if you choose not to convert, your permanent policy will remain in force after the term coverage expires, helping to ensure you still have living benefits and a death benefit available for your entire life.

Hypothetical example

• John and Sarah, ages 42 and 40
• Two children, ages 10 and 12

John and Sarah wanted strong life insurance protection without overspending. They also needed a safety net in case of a serious illness. They combined term and permanent life insurance, both with living benefits.

Step 1: Term Life Insurance ($750,000, 20-year term)

• Affordable higher amount in coverage for immediate needs.
• Living benefits provide early access to funds for medical expenses.

Step 2: Permanent Life Insurance ($250,000, Whole Life)

• Lifelong coverage with cash value accumulation.
• Living benefits for funds in case of a future serious illness

How it helped:

At age 50, John faced a serious heart condition. They used his term policy’s living benefits to cover:

• $75,000 in medical bills
• $50,000 in lost income
• $25,000 in home modifications

Their permanent policy remained intact, ensuring long-term protection.

Why this strategy makes sense

Pairing term and permanent life insurance with living benefits provides several advantages.

Cost-effective protection in early years: Many individuals cannot afford a large permanent policy upfront. Using term life for higher coverage initially allows for protection at a lower cost.

Access to more living benefits when needed: Serious illnesses often occur unexpectedly. With a larger term policy, policyholders can access more funds through living benefits if needed.

Long-term protection without overcommitting financially: Securing a smaller permanent policy early helps ensure policyholders have lifelong coverage while maintaining flexibility in their budget.

Flexibility to adjust coverage over time: The ability to convert term insurance into permanent coverage allows policyholders to adapt their protection as financial circumstances change.

By combining term and permanent life insurance with living benefits, individuals can maximize coverage while maintaining financial flexibility. This structured approach provides a balance between affordability and long-term protection, adapting to changing financial circumstances over time.

Representatives of Ameritas do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your specific situation.

The Accelerated Death Benefit riders are not a long-term care product.

Loans and withdrawals will reduce the policy’s death benefit and available cash value. Excessive loans or withdrawals may cause the policy to lapse. Unpaid loans are treated as a distribution for tax purposes and may result in taxable income.

In approved states, life insurance is issued by Ameritas Life Insurance Corp. In New York, life insurance is issued by Ameritas Life Insurance of New York. Policies and riders may vary and may not be available in all states. Optional riders may have limitations, restrictions, and additional charges.