An accelerated death rider can help you access your own life insurance policy’s death benefit while you are still alive. In most cases, the intent of a life insurance policy is to have the death benefit be distributed to your named beneficiaries after you die. This could be used to help provide general financial support, settle your outstanding debts, pay for funeral and burial expenses, or in whatever way the beneficiary sees fit.
However, with an accelerated death benefit, you may be able to pull from your life insurance policy’s death benefit yourself to help pay for your medical expenses if you develop a serious or terminal condition. Think about your current health as well as your family history of illness to determine if this rider is worth considering.
What Is an Accelerated Death Benefit vs. Standard Death Benefit?
An accelerated death benefit rider is also known as a terminal illness rider or a living benefit rider. It gives policyholders with serious medical conditions the option to access a portion of their life insurance proceeds while they’re still alive. This is different from a standard death benefit, which is triggered only when the policyholder passes away.
For example, consider a life insurance policy with a $500,000 face value and the option to access 40% of the value as an accelerated death benefit. Under the policy’s standard death benefit terms, when the policyholder passes away, the people they named as beneficiaries can receive $500,000.
However, if the policyholder were diagnosed with a terminal illness, they can activate the accelerated death benefit and claim 40% of the policy’s value, receiving $200,000 while they are still alive to help cover medical bills and end-of-life expenses. When they pass away, the remaining 60%, or $300,000, is distributed to their beneficiaries.
How Do Accelerated Death Benefits Work?
Insurers often include accelerated death benefit riders as a standard feature of their policies. When this provision is not automatically included, insurers may offer an optional accelerated benefit rider that applicants can add for a higher premium.
If a policyholder experiences an eligible medical event that triggers the benefit, they can request to activate the accelerated death benefit. The specific conditions that are eligible for the benefit depend on the insurer, but typically includes severe chronic, terminal, or catastrophic illness. Depending on the policy, the accelerated benefit rider proceeds could range from 25% to 95% of the policy’s face value.
A policy with an accelerated benefits rider could provide either a lump sum or monthly payments. Some policies offer beneficiaries a choice of payment methods. However it’s received, this money can be used for medical bills, daily living expenses, or any other costs.
Insurers that provide an accelerated benefit rider for no additional premium may apply an actuarial discount to the benefits they pay out. That means they reduce the amount of the benefit paid to the policyholder as a sort of fee. For example, the insurer may take a specified percentage or flat fee of the death benefit before the rest is distributed to the beneficiaries.
Who Can Access It?
Policyholders may become eligible to access their accelerated death benefit if they experience certain serious health situations. The specific situations can vary depending on the insurer and policy, but general triggers may include:
- Being diagnosed with a catastrophic illness, such as needing an organ transplant
- Having a serious chronic illness, such as cancer, heart disease, or stroke
- Being terminally ill with a life expectancy of less than 24 months
- Needing long-term care or moving into a nursing home
How Do You Access It?
Filing an accelerated death benefit claim is a relatively straightforward process, beginning with contacting your life insurance company to request the claims forms. To complete these forms, be prepared to provide information about your medical condition. Insurers may also ask you to sign an Authorization to Obtain and Release Medical Information form. This gives them permission to access your medical records to process the claim.
The insurer may provide an Attending Physician Statement (APS) form for your doctor to fill out. This form asks for information about your relevant health history, including diagnoses, treatments, and life expectancy. Note that some doctors charge a fee to complete an APS.
What Can You Use It For?
An accelerated death benefit is designed to help cover unexpected expenses associated with being ill, such as medical bills or long-term care costs. However, there are typically no restrictions on how the benefit is spent. Policyholders receive a payment in the form of a check or electronic funds transfer, and once they have the cash, it’s theirs to use how they wish. For example, you could choose to use the benefit to pay for daily living expenses or to provide for family members.
Are There Taxes on Living Benefits?
The Internal Revenue Service (IRS) states that terminally ill people can exclude accelerated death benefits or life insurance settlements from their gross income. People with chronic illnesses may be able to exclude accelerated death benefits or long-term care insurance payments from their taxable income.
While living benefits are generally excluded from your income, there are some exceptions where they may be taxed. For instance, if a policyholder chooses to receive periodic payments rather than a lump sum, the IRS may view a part of the benefit as taxable income. Before accessing living benefits, consider seeking advice from a tax professional in your state.
Things to Consider When Activating an Accelerated Death Benefit Rider
An important thing to keep in mind is that activating an accelerated death benefit rider reduces the amount of money available to your beneficiaries when you pass away. Depending on the amount of the accelerated benefit, there might not be much left for your beneficiaries when you die. However, this may not be a concern if your beneficiary no longer depends on you for financial support.
Accelerated death benefit money could help you remain as comfortable as possible while living with a serious or terminal illness. In addition to covering day-to-day expenses, the benefit might help pay for medical costs that aren’t covered by health insurance, such as a live-in caregiver or experimental treatments to try to cure your illness.
Another thing to keep in mind is that whatever accelerated death benefit you withdraw could be considered income or resources, and this could affect your eligibility for some need-based public assistance programs. For example, if you are receiving Supplemental Security Income (SSI), your benefits may decrease or be discontinued. Accelerated benefits could also affect eligibility for Medicaid. Ask your caseworker or financial advisor for more details.
Other Types of Living Benefits
Though accelerated death life insurance benefits allow those who are critically ill to tap into their death benefit to help pay for care, there are also other types of living benefits that could work for other situations.
- Cash value: Permanent life insurance policies combine a standard death benefit with a cash value account that can grow over time. This cash value is a living benefit for the policyholder. Some options for accessing this benefit include withdrawing money from the policy or taking out a loan against its cash value.
- Long-term care rider: You can add a long-term care rider to a permanent life insurance policy. This rider stipulates that those with eligible conditions or self-care capacity can receive a lump sum or installments of their death benefit while they are still alive to help pay for treatment, nursing care, and daily assistance.
- Life insurance settlement: Also known as a viatical settlement, this option allows a policyholder to sell their life insurance policy for a one-time cash payment. The selling price could range from around 55% to 80% of the policy’s death benefit. When the original policyholder dies, the new owner collects the death benefit.