It's an overdue change in the concept of life insurance that may revolutionize the industry.
Some insurers call it "accelerated death benefits." To Prudential Life, it's "living benefits." Simply put, it means you can use your life insurance death benefits before you die, provided you are terminally ill.
Prudential claims to have originated the concept and introduced it in Canada in 1989. In January 1990, the company began offering it in the United States. Accelerated benefits are not yet widely available, but scores of companies have followed Prudential's lead, including such major players as John Hancock, The Travelers, Connecticut Mutual and Nationwide Life.
Traditionalists object that paying out benefits before the insured dies violates the basic concept of life insurance, which is to create an instant estate for the spouse or another beneficiary. Insurers have violated the concept before, sometimes to their sorrow.
Yet, "living benefits" appears to be a workable marketing innovation. It offers the insurers a powerful sales tool for traditional whole life or permanent insurance. At the same time, it has the potential to bring financial and emotional relief to millions of policyholders.
The concept at least partially fulfills the unrealized role of Medicare's aborted "catastrophic care benefits" program, which was passed and then repealed by Congress -- although insurers say that is not its intention. It does not fulfill the function of long-term care insurance, which is a specific health insurance policy with no death benefits. But, again, it is being sold by some insurers as a substitute for long-term care policies. With nursing home care as high as $50,000 a year, the face value of most life policies would not cover the cost of an extended stay.
Prudential reports that about half the claims it has paid so far were to terminally ill cancer patients. About 25 percent have been to AIDS patients. The company now has liberalized its rules and will make the payout to patients scheduled for an organ transplant.
A woman in Florida planned and paid for her own funeral, paid all her outstanding bills and then died serene, knowing there was nothing left behind for others to handle.
A young Iowa blue-collar worker, dying of cancer, paid off his home mortgage, settled all his financial affairs, arranged his funeral and left his wife secure. He had the policy less than three years and was unaware of his condition when he elected the living benefits option.
A truck driver in Florida, dying of cancer, had contemplated suicide as the only way out of the financial problems he would leave, until he was told he had the living benefits feature in his life insurance policy.
"In all cases we have seen," says Robert Hill, executive vice president of Prudential, "people have been paying off expenses that would be left behind them regardless. Paying in advance rather than after death gave them peace of mind. It's not likely they have taken money away from the beneficiary." In any case, the beneficiary must agree before the advance pay option is exercised.
Substantial variation can be found in the design of the accelerated death benefits products currently available, the American Council of Life Insurance points out. Thus, before you make a purchase you should compare policy features carefully.
Prudential requires no additional premium and offers the option free to its current holders of permanent insurance. Other companies may not, depending on the plan they offer. The advance payout may be as low as 25 percent, but Prudential pays out the total face value, minus only a discount for unearned interest. In a typical case, this might run only $4,000 on a $100,000 policy. The payout may be made in installments or as a lump sum, often at the discretion of the policyholder.
The option has been approved in 48 states. Approval in Kansas is pending, and New York expects enabling legislation to be passed soon.
Washington has said it will not require a person eligible for living benefits to execute them in order to quality for Medicaid. The tax status of the benefits is uncleared, but legislation has been proposed to make the benefits tax-free. There is no known opposition, but consideration of the proposal awaits the introduction of a tax bill, which now seems unlikely this year.