What Is an Accelerated Death Benefit?

An accelerated death benefit (ADB) is a policy add-on that lets you withdraw from your life insurance’s death benefit early if you’re diagnosed with a life-threatening medical condition or terminal illness. By giving you early access to your death benefit, this rider provides the necessary funds to cover medical expenses and alleviate your financial burden when you’re sick.

Eligibility requirements for an accelerated death benefit vary depending on the insurer. But generally, you’ll need to prove that you’ve contracted a terminal or serious illness that could lower your life expectancy.

Accelerated Death Benefits: Bringing You Comfort In Your Final Years

When diagnosed with a severe medical condition or terminal illness, it’s not just the emotional burden you and your loved ones must deal with. There’s also the financial aspect of it. Medical bills, hospice care, and medication costs can add up quickly and put a dent in your savings.

Consider purchasing an accelerated death benefit to alleviate the financial burden you and your family have to carry in the event of a serious illness diagnosis. This life insurance rider allows you to access a portion of your death benefit before you pass away. With your medical expenses covered, you and your loved ones can focus on spending quality time together during your final years instead of worrying about finances.

How Do Accelerated Death Benefits Work?

An accelerated death benefit rider, also known as the living benefits rider, is a type of life insurance policy add-on that lets you withdraw funds from your death benefit while you’re still alive. However, this early access to your death benefit is only available when you’re diagnosed with a terminal illness or serious medical condition.

Most insurers allow you to choose between two payment methods for this benefit: lump sum or periodic payments. If you exercise this rider, you can withdraw anywhere from 25% to 95% of your death benefit, depending on your policy and insurance company. For example, consider a life insurance policy worth $500,000 and the option to access 50% of the value as an accelerated death benefit. If you were diagnosed with a terminal illness, you can activate your ADB rider and receive $250,000 while you’re alive to cover your expenses.

Eligibility

Policyholders must be diagnosed with a serious, chronic, or terminal illness to become eligible to access this type of benefit. The specific medical situations that trigger a living benefit rider can vary depending on the insurer and policy, but they may include:

Terminal Illness: These illnesses cannot be cured and will likely lead to death. Some common terminal illnesses include end-stage cancer or AIDS.
Chronic Illness: Chronic illnesses are long-lasting conditions that can be controlled but not cured, such as diabetes, Alzheimer, and heart disease.
Critical Illness: Critical illnesses include life-threatening conditions such as heart attack, stroke, kidney failure, and organ transplant.
Long-Term Care Needs: Policyholders facing long-term care needs or moving into a nursing home may also be eligible for this rider.

What Can You Use It For?

Policyholders and their loved ones can use this benefit to cover most expenses. These are some common ways people spend their funds:

Medical Expenses: Many policyholders use their ADB to cover medical expenses such as hospital stays and medications.
Hospice or Palliative Care: You can also use your benefit to pay for hospice stay during your final years or palliative care to help you manage your symptoms.
Long-Term Care: If you require long-term care, the benefit can also cover costs associated with assisted living facilities or in-home healthcare.
Living Expenses: Serious or terminal illnesses will most likely make you unable to work. You can use the ADB to pay for rent, groceries, transportation, and other living expenses, so you do not have to worry about making ends meet.

What It Can’t Be Used For

While most life insurance carriers do not have restrictions on how you use your ADB, some do. For example, some insurers prohibit you from using your accelerated death benefit to pay for the following:

Vacations and Luxury Items
Investments
Gambling
Pre-Existing Debts

Note that every insurer has its own list of specific exclusions, so speak with your life insurance carrier to find out about any restrictions before using your funds.

The Difference Between an Accelerated Death Benefit vs. Standard Death Benefit

Simply put, an accelerated death benefit allows policyholders diagnosed with a serious or terminal illness to receive a portion of their death benefit before death. On the other hand, a standard death benefit is paid out to beneficiaries after the policyholder’s passing.

For example, say you purchase a life insurance policy worth $250,000 with the option to access 40% of the value as an accelerated death benefit. If you experience an eligible medical event that triggers the ADB, you’ll receive $100,000 while still alive. When you pass away, the remaining 60%, or $150,000, is distributed to your beneficiaries as a standard death benefit.

How Much Does It Cost?

Most (but not all) insurers do not charge extra for an accelerated death benefit as it’s often already included in the standard life insurance policy. However, if your life insurance company charges an additional premium for this rider, they’ll typically consider your age and health condition to determine the extra cost.

How the Taxes Work

In most cases, as long as you can prove that you’re diagnosed with a severe or terminal illness, your accelerated death benefits are not subject to federal income taxes. However, an exception is when you choose to receive your benefit in periodic payments rather than a lump sum. In this case, the Internal Revenue Service (IRS) may consider a portion of the benefit as taxable income. To avoid triggering hefty taxes on your ADB, seek advice from a tax professional before withdrawing your funds.

Who Should Get an Accelerated Death Benefit?

Tapping into a portion of your life insurance policy’s death benefit while you’re still alive can provide a much-needed financial cushion if you’re diagnosed with a terminal illness. However, as with any financial decision, it’s important to weigh the pros and cons.

Advantages

Advantages include the following:

Financial Assistance: The benefit can be used to pay for medical expenses associated with a serious illness, which can often be upwards of tens of thousands of dollars.
Flexibility: Most insurance providers do not have any restrictions on how you can use the funds.
Reduced Burden on Beneficiaries: Early access to your death benefit can reduce the financial strain on your family and allow them to focus on emotional recovery rather than on finances.
Enhanced Quality of Life: Having the funds to pay for treatment, in-home care, and other necessary medical expenses can improve your quality of life after a terminal illness diagnosis.

Disadvantages

While ADB provides many benefits, it also has some downsides:

Reduced Death Benefit: One of the most significant drawbacks of tapping into your death benefit early is that your beneficiaries will be left with fewer funds when you pass away.
Impact on Public Assistance: Some policies can affect your eligibility for government programs, such as Medicaid, so check with your insurance provider beforehand.
Policy Costs: While most accelerated death benefits are already a part of the standard life insurance policy, some insurance companies may charge you an extra premium to add it to your plan.

How to Get an Accelerated Death Rider

Before purchasing a living benefits rider, check your current life insurance policy to see if it already comes with one attached. If not, here’s how to get the add-on:

Determine Eligibility: Contact your life insurance representative to determine your eligibility.
Gather Required Documentation: Adding a rider after you’ve purchased your life insurance policy will most likely require you to go through the underwriting process again and provide information about your medical records.
Submit an Application: The application process for adding this benefit may vary depending on the insurer, but you could typically complete it online.
Await Approval: Once you’ve requested to add this rider to your policy, simply wait for approval from your insurance provider.
Receive Funds: If approved, you can access the ADB funds if you’re diagnosed with a terminal illness or medical condition that will reduce your expected lifespan.

Alternatives to Accelerated Death Benefits

While an ADB can provide you and your family comfort if you’re diagnosed with a serious illness, it’s not the only life insurance add-on available. Here are some alternatives to the accelerated death rider to consider.

Viatical Settlements

A viatical settlement allows you to sell your life insurance policy at a discount in exchange for cash if you’re diagnosed with a terminal illness. Plus, you can typically receive a larger payout with a viatical settlement than an ADB. However, since you must sell your policy, taking the viatical settlement route means your beneficiaries may no longer receive death benefits upon your death.

Life Settlement

A life settlement works similarly to a viatical settlement. The main difference between the two is that the policyholder in a life settlement is typically healthy. In contrast, a viatical settlement pertains to the sale by a policyholder who’s terminally ill. Life settlements can provide financial relief when you need cash, even if you’re not sick, but you typically need to be at least 65 years old to be eligible.

Long-Term Care Insurance

While you must be diagnosed with a terminal illness to access your living benefits rider, a long-term care rider can be triggered by the diagnosis of a chronic illness that leaves you unable to take care of yourself. You can use the funds from the payout to cover costs related to nursing homes, assisted living facilities, and in-home care. Like the accelerated death benefit, long-term care insurance can also be added to your existing life insurance as a rider.

What To Consider When Getting an Accelerated Death Benefit

Just like purchasing any other financial product, it’s always important to carefully weigh all your options before deciding. Here are a few things to consider before getting this rider:

Your Financial Needs: Determine how much money you’ll need to cover expenses should you become terminally ill and whether adding the ADB makes financial sense.
Payout Terms: Before adding this rider, review the payout terms, such as how much of the policy’s value you can access and how long it’ll take to receive the funds.
Tax Implications: An accelerated death benefit may be taxable depending on your chosen payment method, so be sure to understand the potential tax ramifications before signing on the dotted line.
Policy Limitations and Exclusions: Each insurer and policy may have its limitations and exclusions. Ensure you’re aware of them, and speak with your life insurance representative if you have any questions.

If you need help determining the most suitable accelerated death benefit option for your needs, talk to a life insurance agent or a financial advisor who can guide you in the right direction.

Putting It All Together

While the standard death benefit in a life insurance policy provides financial relief for your loved ones after your death, an accelerated death benefit rider allows you to receive a portion of your death benefit to cover medical expenses when you’re still alive. This way, instead of worrying about the cost of medical treatment following a difficult diagnosis, you can focus on spending quality time with your loved ones. Check with your life insurance company to see whether ADB is already a part of your plan. If not, consider adding it to your policy.

Understanding Accelerated Death Benefit: Providing Financial Relief During Difficult Times