Mortgage Protection With Living Benefits: How It Works
The short version
Living benefits are riders that let you use part of your life insurance while you’re still alive if you’re diagnosed with a qualifying critical, chronic, or terminal illness. Whatever you receive early is subtracted from what your beneficiaries get later. For a family with a mortgage, that can mean help with the payments during treatment, not only after a death.
What living benefits are
The formal name is an accelerated death benefit rider. It lets the insurer pay part of the death benefit early, usually as a lump sum, when you meet the policy’s definition of a qualifying illness. You decide how to use the money: mortgage payments, medical bills, lost income, or anything else.
Many mortgage protection policies offer these riders, which is one reason people choose them over a bare-bones life policy. Availability, definitions, and limits vary by carrier and state.
The three common types
- Terminal illness. Usually requires a doctor’s certification that your life expectancy is 12 to 24 months or less, depending on the policy.
- Chronic illness. Commonly means you can’t perform at least two basic activities of daily living, such as bathing, dressing, eating, using the toilet, continence, or moving in and out of a bed or chair, or that you have a severe cognitive impairment.
- Critical illness. Covers a list of specific conditions. Lists often include heart attack, stroke, invasive cancer, major organ transplant, and kidney failure, but each policy has its own list and definitions.
How it works with your mortgage
Here’s a simplified, hypothetical example. Say you have a $300,000 policy sized to your mortgage, and you’re diagnosed with a condition that qualifies under the critical illness rider. The carrier might let you accelerate part of the benefit. If you receive $50,000 early, you could use it to keep up with house payments while you’re out of work.
Later, your beneficiaries would receive the remaining benefit: $300,000 minus what was paid early, minus any fees or adjustments the policy applies. How much you can accelerate depends on the carrier, the policy, and the condition.
What it costs
Many policies include accelerated benefit riders at no extra premium and charge only if you use them, usually as a fee, a discount, or an interest-style adjustment that reduces the amount paid out. Other policies charge a premium for the rider. Either way, ask exactly how the payout is calculated before you buy.
Questions to ask before you buy
- Which conditions qualify, and how does the policy define each one?
- What’s the most I can receive early, in dollars or as a percentage?
- What does it cost to use the benefit?
- How does using it affect the remaining death benefit and my premiums?
- Is there a waiting period after the policy starts?
- Is the rider available in my state?
A note on taxes
The tax treatment of accelerated benefits depends on your situation and the type of illness. Talk with a tax professional before you claim one.
Is it worth having?
For many families, the risk to the mortgage isn’t only a death. A serious illness can interrupt income for months. Living benefits let one policy help in both situations. They don’t replace health insurance or disability insurance, but they can add a layer of protection for the home.
Ask about living benefits with your quote
Answer 9 quick questions and a licensed agent will show you options from multiple carriers, including which ones offer living benefits in your state. It takes about 60 seconds and there’s no obligation. New to this? Start with what mortgage protection insurance is.