While life insurance usually looks forward to giving insurance benefits to beneficiaries upon the death of the insured, life insurance can also carry certain benefits for the insured to be enjoyed by him while he is still alive. These are called living benefits, as distinguished from death benefits. These living benefits are available only where equity or “cash value” accumulates. This cash value increases as the policy matures. These can be found in whole life insurance, variable unit-linked insurance, and endowments but not in term life insurance.
The right to avail of these benefits are stipulated in the insurance policy itself or as benefits in nonforfeiture clauses. A nonforfeiture clause would provide that a policyholder can avail herself of certain living benefits after a lapse due to nonpayment of premiums.
The living benefit allows the insured to access a portion of the death benefits, usually in cash, while the insured is still alive. Otherwise, the death benefit, equivalent to the face amount, will go to the beneficiaries upon the death of the insured. Therefore, living benefits refer to the cash benefits available to the insured after they have paid premiums over a specific period or number of years. The cash values and the endowment proceeds of a permanent life insurance policy are considered living benefits since they are made available to the insured while they are alive.
Thus, the insurance policy can, in fact, be tapped as an alternative source of funds. This is done by tapping into the cash value of the policy such as by availing of a policy loan. A life insurance builds up a cash value that accumulates over time. The cash value of the insurance policy may be used for any financial need whatsoever. The natural consequence is that in tapping into the cash value, the insurance policy is at risk of not providing any money to the intended beneficiaries.
The living benefits may be availed of through any of four nonforfeiture benefit options: a) loan value, b) extended term insurance, c) paid up insurance, and d) cash surrender value.
Loan value is also known as the policy loan or life insurance loan. The policyholder may take out a loan against his insurance policy as the collateral. This loan need not be paid back, unlike a regular loan. The amount payable will just be deducted from the death benefit that should go to the beneficiaries. Just like a regular loan, interest rates apply.
Extended term insurance “allows the policyholder to use the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole life policy.”The whole life insurance policy is surrendered in place of the term policy, which will end after a certain number of years. The insurance policy is only canceled at the end of this term. In acquiring the term policy, no premium payments coming anew from the insured would have to be made.
Paid up insurance is where the unpaid insurance policy will be considered as fully paid but the policy will have a corresponding reduced amount. Thus, the policyholder will receive a lower amount of fully paid whole life insurance. The attained age of the insured will determine the face value of the new policy. This, however, will depend on how much cash value has been generated. A life insurance company will usually require three years of premiums before a policy would become available for reduced paid up insurance.
The cash surrender value is the sum of money an insurance company pays to a policyholder, or an annuity contract owner in the event that his or her policy is voluntarily terminated before its maturity or an insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies.
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Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.
