‘Living Benefits’ Policy Has Some Drawbacks
Prudential Insurance Co. of America has come up with a new and potentially more attractive variation on life insurance plans that allows you as policyholder to collect benefits while still alive.
But the plan--not yet available in California--may not be the best deal for you.
Under its recently announced Living Needs Benefit program, Prudential will pay death benefits that normally would go to your survivors to you instead, under one of two conditions: You must either be terminally ill and produce a doctor’s certificate showing you have less than six months to live or you must be in a nursing home for six months with no hope leaving.
The plan can be a godsend for those facing the ever-growing costs of dying. And it’s timely, coming after Congress’ recent cancellation of catastrophic Medicare benefits.
The benefits are payable either in a lump sum or over time, and you can use the money as you wish.
Payment of such “living benefits” is a recent, but not new, concept in life insurance. As many as 30 other insurers in the past two years have begun offering living benefit plans. But these early versions have drawn fire from some advisers as expensive, often because they charge extra premiums. Some also limit the death benefit available to you.
Prudential’s plan, on the other hand, charges no extra premium. You pay the same whether you take the living benefit option or not. And you can get up to the full death benefit, reduced by the interest the firm forgoes by paying the benefit early.
And the plan is available to existing policyholders as well as new ones, as long as their policies meet certain minimum amounts.
“It seems like a reasonable way of getting the death benefit into the hands of the living,” says Glenn S. Daily, an independent insurance consultant in New York.
While the plan has so far been approved in about 16 states--but not yet in California--other life insurers are seriously studying it.
“If it goes over, everybody will have to do it,” says James H. Hunt, a director of the National Insurance Consumer Organization.
But signing up for it will not be a “no-brainer.” You’ll have to deal with several questions.
The most critical question is whether a portion of the benefits will be taxed. Death benefits are tax free if received by beneficiaries; the portion above your premium payments is normally taxable if you get them. The Internal Revenue Service has yet to specifically rule on the treatment of living benefits, but it’s expected to rule that they are taxable.
In some cases, you might be willing to incur the tax; say, if your beneficiaries have become self-sufficient and no longer need your life insurance proceeds. Or you might be in a low tax bracket.
Premium cost is another consideration. “Prudential is not known as a low-cost company,” Hunt says. “I wouldn’t want anyone to switch from a low-cost policy just to get this benefit.”
Also to be considered is whether receiving living benefits will disqualify you from Medicaid or other aid programs, asks Joseph M. Belth, professor of insurance at Indiana University.
Finally, ask yourself whether you really want your life insurance benefits to go to you, instead of your survivors.
There are alternatives. One, Hunt suggests, is to borrow from the cash value of your life insurance. Another option is to get a separate long-term care policy to cover nursing home expenses. Those plans, however, carry their own drawbacks and limitations.
“This is not intended to be a substitute for health insurance,” says Richard E. Meade, assistant general counsel at Prudential. “All we’re trying to do is to make life insurance more flexible.”
Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot personally answer letters and phone calls. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
