In an effort to make life insurance policies more appealing and fit more of a family’s financial needs, measuring the risk, insurance companies have included insurance riders that cover terminal illness, critical illness, and chronic illness. The idea being, that the insured may develop an illness that causes great financial stress on a family, which could be covered by their life insurance. Should the person eventually pass away, why not accelerate the benefit a few years and pay something now? The policy rider may or may not be a great benefit.

These accelerated benefits, also known as “living benefits” are defined as follows:

— Chronic Illness: an insured is unable to perform two out of six activities of daily living, such as bathing or toileting, walking or transferring to or from a bed or chair.

— Critical Illness: an insured is diagnosed with a major illness such as cancer, heart attack or stroke. Terminal Illness: meaning a life expectancy of less than 12-24 months, depending on state limitations.

Acceleration of Benefits and Policy Maximums

These riders give you the option to access your policy benefits prior to death in the event of terminal or other life changing illnesses, when the need for additional funds may be crucial. This can be done either as a partial acceleration, meaning a part of your death benefit may remain in force, or a full acceleration. If you elect full acceleration, your policy will be terminated.

Generally there are limits on these policies, the maximum death benefit available for someone under age 65 is $2,000,000 and the maximum death benefit for those over age 66 is $1,000,000. The living benefit is based on the insurance amount; should you use the living benefit, you will not be paid the total amount of the death benefit.

How it works

If a 45 year old insured male becomes ill, for example with prostate cancer (common cancer for men), this person is insured with a ten year term policy for $1,000,000. The insurance company will look at how long the policy has been in force, age of the insured, type of illness, chance of recovery, policy death benefit, etc., they will look at everything related to this person and their current situation, then the actuaries will perform an analysis and make the insured an offer. This offer may be only a fraction of the total death benefit – maybe only $100,000 or less; or it could be more. Each person and their illness, stage in life, and how long the policy has been on the books are all considered when making the offer to the insured. In the end, it may or may not be worth it to give up the insurance policy for a living benefit.

Some policies state that they will pay up to 60% of the death benefit, some more, but the bottom line is that it all comes down to what the insurance company will offer considering all factors.

Typically, in the case of a terminal illness, the insured will get a higher pay out because it may be a matter of months until the insurance company will have to pay the full death benefit. The great advantage to this type of rider is for someone in business they can use the living benefit to help settle their affairs with their business partner(s) before death, leaving their heir(s) free of such complicated burdens. They may also choose to use some of the funds to travel or engage in other activities before they become too incapacitated by their illness.

While these benefits may be valuable for many people, they do not solve all the problems, nor replace the need for good medical insurance, long-term care insurance, life insurance or disability insurance. If the rider is used, the policy may be terminated and may end the possibility for a person to obtain additional life insurance in the future. The rider is an important extra benefit hopefully not in a position of last resort.

The other day I was in a store that was having a closing sale nearly everything was 70% off. I struck up a conversation with the manager who was losing his job. I asked him about what he was going to do next. He told me that he had been with the company for 21 years and he was not sure, but he was going to just hang out until he decided and found the right opportunity. Then he said this, “when I learned that the two companies merged, and in the future there was a chance I might lose my job, my wife and I decided to get completely out of debt. So we have no debt and can live on very little.”  It was just over two years after the merger that we spoke and the store he managed was now closing. I though how insightful. I was thrilled to learn of another person who was debt free and had the freedom to choose what to do next.

Becoming debt free should be a goal of each person. I have seen young college graduates who have finished school with well over $200,000 in student loans. As one client was telling me it is “discouraging”. The bondage of debt is discouraging! And what do many young graduates do - load up more debt and buy a new automobile! This debt can be extremely onerous!

This weeks article is mostly coming from a friend, Shawn Lane who is the Chief Operations Officer at Financial Renovations Solutions, (FRS). His company has helped many people improve their credit score and at the same time get more of their debt paid off. Being debt free greatly strengthens your financial position. Simply put, It is FREEDOM. 

Unfortunately some people find that they have slipped so much into debt that creditors start calling and some accounts get sent to collections. Shawn provides some answers in those difficult situations:

Will paying off a collection account improve my credit score?

I get this question a lot. Although I would never suggest NOT paying your debts, you need to be very careful when paying a collection account. If you are 100% sure you owe it, then maybe you should pay it (more on this later). However, if your goal is to improve your credit score, paying it will likely have the opposite, negative effect.

The FICO scoring model treats collection accounts as closed accounts, and the balance on these accounts have no impact on your credit score. What matters most is “the date of last activity”, which is the date the original debt went bad, or the date of your last payment to the collection agency. This means that a $150 collection account from last month has more negative impact to your credit score than a $3,000 collection account from last year. Therefore, paying it will not increase your credit score. In fact, often times paying it will drop your credit score even more by creating new and more recent activity on this account. 

Further, paying a collection account does NOT remove it from your credit report. You end up spending your money and reducing your credit score.

If you plan to pay a collection account, first secure an agreement with the collection agency to remove the entire collection account from your credit report upon receipt of payment. Better yet, make them first prove you owe the debt by sending them a debt validation letter AND make the credit bureaus prove they are reporting the account 100% accurately on your credit report. If they can’t prove it, they must remove it! Utilize the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, as these protect consumers like you and me! You will have a very good chance of getting the account deleted from your credit report, which WILL increase your credit score.

I know Shawn has worked with people all over and is straight up honest in what he does. He truly cares about his clients. Everyone of us knows someone who needs help with their debts, pass this article on to them, you never know what will really flip a switch with someone. I wish you the best of luck in obtaining real freedom, by becoming debt free.

Remember:

"Continuous effort - not strength or intelligence - is the key to unlocking our potential." ~ Winston Churchill