Life Insurance With Living Benefits: What It Means to Use a Policy While You Are Alive

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There is no single answer to “should I get life insurance with living benefits,” because it depends on the policy you already have, the conditions a given rider actually covers, what accessing money early does to the death benefit, and how the payout would be taxed in your situation. This piece is written for adults weighing a life insurance decision who want to understand how a policy can pay out while the insured is still living, not only after death. A useful first step is to pull out any policy you already hold and find the rider or endorsement pages before reading further.

The core idea worth holding onto: a living benefit lets you tap part of a life insurance policy’s value early, but that access is conditional, it usually shrinks what your beneficiaries receive, and the terms vary a lot. Everything below builds on that.

Contents

What Living Benefits Actually Are

A living benefit is money you can pull from a life insurance policy before the insured dies. The most common form is the accelerated death benefit, which the National Association of Insurance Commissioners describes plainly: an accelerated death benefit is “also known as a ‘living benefit'” (NAIC).

Start with what life insurance is for. At its base, life insurance provides financial support for loved ones if the policyholder passes away, and term life covers a set period of time (NAIC). A living benefit changes the timing of that support. Instead of waiting until death, the policyholder can reach some of the money early when certain serious health events happen.

What kinds of events? According to the AARP Policy Book, accelerated death benefits let policyholders access benefits before death for a terminal illness, a catastrophic illness or accident, or a need for long-term services and supports (AARP Policy Book).

Here is the part that surprises people. The money is not extra. It comes out of what your family would have received. The NAIC is direct about this in the long-term care context: benefits paid as an accelerated death benefit likely will reduce the death benefit the policy will pay after you die (NAIC). So a living benefit is best understood as pulling forward part of your own coverage, not adding a new pool of money.

Types of Living Benefit Riders and Endorsements

Most living benefits attach to a base policy through a rider or endorsement. A rider, in the NAIC’s words, is an amendment to an existing insurance contract that changes the terms of the original policy (NAIC). That is the mechanism. You start with a life insurance policy, then bolt on language that lets you accelerate part of the benefit under defined conditions.

The qualifying conditions map to the events named above: a terminal illness, a catastrophic illness or accident, or a need for long-term services and supports (AARP Policy Book). The exact triggers, definitions, and limits are set by the contract, and they differ from one insurer and state to the next. Read the rider, not a summary of it.

One limitation is easy to miss. Unlike a standalone long-term care policy with inflation protection, the benefits under a long-term care rider typically do not increase over time (National Council on Aging). A benefit amount that looks generous today may buy noticeably less care years from now.

There are also combined products. The NAIC notes that life and annuity long-term care hybrid products may be either reimbursement or indemnity products and may be marketed as providing long-term care benefits (NAIC). “Reimbursement” and “indemnity” are not marketing words. They describe two different ways a policy pays, and the difference affects what you actually collect.

Changing coverage has a price. When an endorsement reduces or increases coverage, that can have an impact on your premium (NAIC). Adding a living benefit rider is a change to the contract, so it is reasonable to expect it to show up in what you pay. None of this points to a single right rider. It points to reading the specific terms and asking what each one costs and covers.

Using Living Benefits for Long-Term Care

Living benefits can help fund long-term care because a need for long-term services and supports is one of the events that can trigger access to benefits before death (AARP Policy Book). AARP also explains that permanent life insurance policies — whole life, universal life, variable life, and variable-universal life — build up cash value in addition to the death benefit they provide, which is part of why these policies can be structured to help with care costs (AARP).

Two cautions belong right here. First, using a life insurance living benefit is not the same as owning a dedicated long-term care policy; the scope of what is covered and the way benefits grow can differ, including that a long-term care rider’s benefits typically do not increase over time (National Council on Aging). Second, money used for care still comes out of the death benefit — long-term care benefits paid as an accelerated death benefit likely will reduce the death benefit the policy will pay after you die (NAIC).

So the trade-off is concrete. Care money now means less for beneficiaries later. Whether that trade fits a given household depends on facts a policy page can’t know, which is exactly why the specifics belong in a conversation with a licensed professional.

How Living Benefit Payments Are Taxed

Accelerated death benefits can be excluded from income in some situations, but not automatically. The IRS states that accelerated death benefits are fully excludable if the insured is a terminally ill individual (IRS Publication 525). That is a specific condition, not a blanket rule.

For benefits tied to chronic illness, the rules are tighter. The IRS explains that accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit (IRS Publication 554). “Up to a limit” matters: periodic payments above the applicable cap can be taxable.

Tax outcomes turn on the details of the payment and the insured’s situation, and tax rules change over time. A qualified tax professional can apply the current rules to a specific case. Nothing here should be read as a promise of a tax-free payout.

Cash Value as Another Way to Use a Policy While Alive

There is a second way to get money from a policy while alive, and it works differently from an accelerated death benefit. Permanent policies build cash value. AARP notes that permanent life insurance policies — whole life, universal life, variable life, and variable-universal life — build up cash value in addition to the death benefit (AARP), and that these policies, including whole life and universal life, build cash value that can be accessed through a withdrawal or a loan (AARP).

The distinction is worth naming. An accelerated death benefit is triggered by a qualifying health event. A cash value withdrawal or loan is not — it is a feature of certain permanent policies you can generally use for other reasons. But like accelerating a benefit, taking money out of cash value reduces what the policy can pay later, and loans and withdrawals can carry tax consequences depending on how they are structured. This is not free money sitting on the side. It is part of the policy’s own value.

How Behavioral Finance Can Shape the Decision

People often overlook the living side of life insurance, and behavioral research offers some clues about why. These findings describe general patterns across study populations; they are associations, not a prescription for what any individual should do.

One thread is how we handle small probabilities. Classic work in prospect theory observed that overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling (Kahneman & Tversky, 1979). We don’t process rare-but-serious events cleanly, which can distort how we value protection against them.

Another thread is framing. Research on decision-making has shown that the dependence of preferences on the formulation of decision problems is a significant concern for the theory of rational choice (Tversky & Kahneman, 1981), and later work found that losses and disadvantages have greater impact on preferences than gains and advantages (Tversky & Kahneman, 1991). How a benefit is presented can change how much we seem to want it. That is an observation about people in general, not a judgment about you.

Framing shows up specifically in the care decision. One study found that respondents subject to narrow framing are substantially less likely to buy long-term care insurance than average (Gottlieb & Mitchell, 2020). And insurance lapse research proposed two behavioral models consistent with the evidence: that consumers forget to pay premiums, and that consumers understate future liquidity needs (Gottlieb & Smetters, 2021). None of this says these choices are foolish. It says the patterns are common and understandable, which is a good reason to slow down and read the actual terms. These findings describe associations, not what any single household should do.

The useful question is not whether living benefits feel reassuring, but whether that added flexibility actually improves the household’s protection after the cost, contract limits, and reduced death benefit are considered.

What Living Benefits Cost

Cost is the section where honesty matters most, because a single figure would mislead. What a living benefit rider adds to a premium depends on the insurer, your age, your health, the coverage amount, and the rider type. General guidance from the NAIC is blunt about the starting point: before you buy a life insurance policy, be sure you can afford the premium (NAIC). Adding a rider is a change to coverage, and changes to coverage can affect the premium. The only reliable number is a personalized quote from a licensed insurance professional for your specific situation.

When Keeping What You Have Is the Right Answer

Doing nothing is sometimes the sounder move, and it deserves real weight here. If you already hold coverage that fits your family’s needs, adding a rider or switching to a permanent policy is not automatically an improvement. Changes to coverage can raise your premium (NAIC), and a policy you can comfortably keep paying may serve better than a fancier one you struggle to afford — the NAIC’s plain advice to be sure you can afford the premium cuts both ways (NAIC).

There are other reasons to pause. A living benefit reduces the death benefit your family receives (NAIC), so if the death benefit is the whole point of your coverage, accelerating it works against that goal. And a long-term care rider whose benefits do not increase over time (National Council on Aging) may not be the care solution it appears to be. The case for waiting, or for keeping exactly what you have, is a legitimate one.

The comparison is not only a policy with the rider versus one without it; it is also whether the same risk is already covered by savings, other insurance, or protection you would rather preserve for beneficiaries.

Questions to Bring to a Licensed Professional

The goal here is not to tell you what to choose but to help you ask sharper questions. Based on how these products work, these are worth raising:

  • Which specific conditions trigger the living benefit, and how does the contract define each one? The triggers are set by the rider (NAIC).
  • How much will accelerating a benefit reduce the death benefit? It generally does reduce it (NAIC).
  • If the rider is for long-term care, do the benefits increase over time, or stay flat? Many riders stay flat (National Council on Aging).
  • For a hybrid product, does it pay by reimbursement or indemnity (NAIC)?
  • How would a payout be taxed given my situation? Some accelerated benefits are excludable, some only up to a limit (IRS Publication 525; IRS Publication 554).
  • What does the rider add to the premium, and can I afford it long term (NAIC)?

A licensed insurance professional or financial advisor can apply these to your actual policy and circumstances.

What Research Can and Cannot Tell You

The behavioral studies cited above describe how groups of people tend to behave. They report associations across study populations, not rules about any one person. Finding that framing is linked to lower long-term care insurance uptake (Gottlieb & Mitchell, 2020) does not mean framing is driving your decision, and it does not say whether a living benefit rider is right for you. Research can flag patterns worth watching in yourself. It cannot substitute for reading your own contract or getting advice suited to your situation. Nothing in that research characterizes life insurance as an investment or a savings plan.

Frequently Asked Questions

Do living benefits reduce the death benefit? Generally, yes. Benefits paid as an accelerated death benefit likely will reduce the death benefit the policy will pay after you die (NAIC). The money you use early comes out of what beneficiaries would receive.

Are living benefit payouts taxable? It depends on the situation. The IRS states that accelerated death benefits are fully excludable if the insured is a terminally ill individual (IRS Publication 525). For payments made on a per diem or periodic basis without regard to costs, they are excludable only up to a limit (IRS Publication 554). A tax professional can apply the current rules to your case.

Can I add a living benefits rider to an existing policy? A rider or endorsement is an amendment to an existing insurance contract that changes the terms of the original policy (NAIC). Whether a specific rider is available on your specific policy depends on the insurer and state, so check with your carrier.

Is a living benefits rider the same as long-term care insurance? No. A living benefit can help with a need for long-term services and supports (AARP Policy Book), but unlike a standalone long-term care policy with inflation protection, a long-term care rider’s benefits typically do not increase over time (National Council on Aging).

Key Terms

Accelerated death benefit — Money from a life insurance policy paid to the insured before death under qualifying conditions; also known as a living benefit (NAIC).

Living benefit — The general term for accessing a life insurance policy’s value while the insured is alive, whether through an accelerated death benefit for a terminal illness, catastrophic illness or accident, or long-term services and supports need (AARP Policy Book).

Rider (endorsement) — An amendment to an existing insurance contract that changes the terms of the original policy (NAIC).

Cash value — An amount that certain permanent policies build up in addition to the death benefit, which can be accessed through a withdrawal or a loan (AARP).

Reimbursement vs. indemnity — Two ways a hybrid long-term care product can pay benefits (NAIC).

References

AARP. (2025, January 10). How life insurance can pay for long-term care. https://www.aarp.org/caregiving/financial-legal/insurance-pay-long-term-care/

AARP. (2025, July 22). Need cash in retirement? Here are 10 ways to line your pocket. https://www.aarp.org/money/retirement/how-to-make-money-in-retirement/

AARP Policy Book. (n.d.). Living benefits. https://policybook.aarp.org/policy-book/long-term-services-and-supports/private-sector-approaches-financing-long-term-services-and-supports/living-benefits

Gottlieb, D., & Mitchell, O. S. (2020). Narrow framing and long-term care insurance. Journal of Risk and Insurance. https://doi.org/10.1111/jori.12290

Gottlieb, D., & Smetters, K. (2021). Lapse-based insurance. American Economic Review. https://doi.org/10.1257/aer.20160868

Internal Revenue Service. (2025). Publication 525 (2025), Taxable and nontaxable income. https://www.irs.gov/publications/p525

Internal Revenue Service. (2025). Publication 554 (2025), Tax guide for seniors. https://www.irs.gov/publications/p554

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica. https://doi.org/10.2307/1914185

National Association of Insurance Commissioners. (n.d.). Life insurance. https://content.naic.org/consumer/life-insurance.htm

National Association of Insurance Commissioners. (2019, August 22). What is an insurance endorsement or rider? https://content.naic.org/article/consumer_insight_what_insurance_endorsement_or_rider.htm

National Association of Insurance Commissioners. (2020, December 30). Do you know how to use an insurance rider or endorsement? https://content.naic.org/article/consumer_insight_do_you_know_how_use_insurance_rider_or_endorsement.htm

National Association of Insurance Commissioners. (2022). A shopper’s guide to long-term care insurance. https://content.naic.org/sites/default/files/publication-ltc-lp-shoppers-guide-long-term.pdf

National Association of Insurance Commissioners. (2023, September 6). What type of life insurance is right for you? https://content.naic.org/article/consumer-insight-what-type-life-insurance-right-you

National Association of Insurance Commissioners. (2025, November 14). Life insurance. https://content.naic.org/insurance-topics/life-insurance

National Association of Insurance Commissioners. (2017, July 19). Private market options for financing long-term care services. https://content.naic.org/sites/default/files/inline-files/cmte_b_senior_issues_related_private_mkt_options_ltc_svc_0.pdf

National Council on Aging. (2024, October 18). What are the three types of long-term care insurance? https://www.ncoa.org/article/what-are-the-three-types-of-long-term-care-insurance/

Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science. https://doi.org/10.1126/science.7455683

Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics. https://doi.org/10.2307/2937956