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Consider 'living benefits' of life insurance


New York -- When shopping for a life insurance policy, ask about "living benefits." You may never use them. In fact, it's often imprudent to do so. But having this option may serve a need that you cannot now predict. About 150 insurance companies now provide living benefits to more than 2 million policyholders, according to the American Council of Life


With a living (or "accelerated") benefit, you can collect on your life insurance before you die. This isn't a loan against your policy's cash value. It's a straight pre-payment of death benefits, to help pay your household expenses and medical bills.

Depending on the policy you choose, you can collect under one or more of these circumstances: (1) A doctor certifies that you probably have no more than six, 12 or 24 months to live; (2) you need extraordinary medical treatment, such as a life-saving organ transplant; (3) you permanently enter a nursing home or hospice; (4) you need costly home health care.

Avoid policies that pay only if you contract a specific disease, like life-threatening cancer; they're generally too limited to be practical.

The most generous companies, like Prudential, give up to 95 percent of your policy's face value, with no dollar limit. But most offer 25 percent to 50 percent of face value, up to a specified dollar amount.

Some companies provide living benefits only to policyholders who choose them. The trend, however, is to extend them to all policyholders, old and new. So you might have this option without realizing it. Most insurers restrict it to universal or whole-life policies. A few extend it to term-policy holders and even to employee group life insurance.

Here's where living benefits might come in handy:

* For small businesses, which buy coverage on their key people. The company could buy out a terminally ill partner while he or she is still alive. This would allow the partner to oversee the terms of sale, to be sure they're fair.

* For people at risk of getting AIDS. David Petersen, a retired financial planner who has AIDS, says that when people get sick, they need more income, not less. A policy with living benefits can supplement health and disability policies, he says, although it's not a substitute for them.

* For people who bought or kept life insurance even though they have no family to support. With living benefits, they'll have a chance to get something more out of the policy for themselves.

* For people who haven't saved enough money to finance the cost of a serious illness. You leave less for your family to live on, when you use your life insurance for medical bills. But your family would have to pay those bills anyway.

It's important to note, however, that you can't use the same life-insurance dollar twice. If you plan to use living benefits for the cost of a final illness or a nursing home, that money won't also be there for your spouse. To have money for both, you'll need a larger insurance policy, which can be expensive. A more efficient way to cover nursing-home or home-health-care costs is a long term care insurance policy, advises Deena Katz, a financial planner in Coral Gables, Fla.

Avoid policies that charge for the living benefit whether you use it or not (typical cost: 5 percent to 15 percent of your premiums). Instead, go with an insurer that charges only when the benefit is triggered. Take Prudential. If you're terminally ill and opt for the top benefit, you'll get 90 percent to 95 percent of your policy's face value. The rest goes to Pru, to compensate it for lost $H premiums and interest on the early payout.

You can also take just a portion of the face value. Say you have a $100,000 policy and want $28,000 cash. Pru would charge you $2,000 for taking the early benefit, leaving you with $70,000 worth of coverage. Your premiums would drop to reflect the lower face amount.

(Jane Bryant Quinn is a syndicated columnist. Write her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.)

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