Most people think life insurance is designed to pay out a death benefit to your loved ones after you die. But what if you are diagnosed with a terminal illness and given less than two years to live? In this case, you may be able to accelerate your life insurance death benefit.
Accelerated Death Benefit (ADB) is a provision in some life insurance policies that allows the policyholder to receive to collect some of the life insurance policy’s face value while still alive. The accelerated death benefit provision is also known as the living benefit provision; this provision can be a good option for a person facing a terminal illness who needs to cover end-of-life expenses or leave money to loved ones.
This blog post will discuss the pros and cons of Accelerated Death Benefits to help you decide if this approach is right for you.
What is Accelerated Death Benefit?
The accelerated death benefit is a feature in most life insurance plans that allows someone to receive a portion of their death benefit early — to spend while they are still alive. ADB is a common practice available from almost all life insurance companies. It is designed for people with a terminal illness with a predicted life span of six months to one year.
The accelerated death benefit is also known as a living benefits rider, chronic illness rider, terminal illness rider, critical illness rider, and long-term care supplement. If your life insurance policy has any of these terms, it almost certainly refers to the accelerated death benefit.
The quantity available from the accelerated death benefit varies by insurer and ranges between 25% to 95% of the death benefit, depending on your policy. The accelerated death benefit rider does not take into account income taxes.
How Accelerated Death Benefit Works
The accelerated death benefit coverage – or a rider – in a life insurance policy allows some of the proceeds of the policy to be paid to the insured if certain events occur. The beneficiary’s accelerated benefit will be subtracted from the death benefit paid following the beneficiary’s death.
To receive the accelerated death benefit, the policyholder must be diagnosed with a terminal illness by a physician and have a life expectancy of 12 months or less. The insurer will require written proof from the attending physician before releasing any funds.
Example of Accelerated Death Benefit
For example, if you have a $500,000 life insurance policy with an accelerated death benefit rider and die of natural causes, your beneficiaries will receive the full $500,000. However, suppose you are diagnosed with a terminal illness and elect to receive the accelerated death benefit. In that case, your beneficiaries will only receive the death benefit minus the amount of the accelerated death benefit that you received while alive.
Accelerated Death Benefit Fees and Restrictions
Accelerated death payments are limited in several ways.
- The accelerated benefit on permanent insurance used to pay off debt will be paid less than the outstanding loan amount.
- The insurance does not cover many illnesses.
- Life insurance companies sometimes charge a one-time fee of $150 to activate the quick death benefit rider and receive the money.
- This isn’t intended to be a substitute for long-term care insurance.
The accelerated death benefit payment, considered a lien, accrues interest over time. Your beneficiaries will receive the death benefit and any accrued interest when you pass away.
Who Can Apply for Accelerated Death Benefit?
The accelerated death benefit is available to any life insurance policyholder with a terminal illness with a life expectancy of 12 months or less (some require a life expectancy of 24 months or less). A doctor’s or medical specialist’s certification stating the policyholder’s diagnosis and the life expectancy is required.
You’ll want to double-check your eligibility with your insurance provider. You might still qualify for accelerated benefits if you’re not terminally ill. Some insurers will offer you the benefit if you are critically ill, chronically unwell, or require long-term care.
What Does Accelerated Death Benefit Cover?
Accelerated death benefit covers these four conditions:
- Chronic illness: A persistent, slowly progressive illness that prevents you from doing at least two activities of daily living, such as dressing or feeding yourself.
- Critical illness: Critically ill persons experience a major heart attack, invasive cancer, paralysis, major organ transplantation, or end-stage renal failure.
- Long-term care: If a person cannot perform at least two activities of daily living, even if they are not considered chronically ill in some long-term care situations.
- Terminal illness: A cluster of symptoms is present with a significant reduction in cell function. A range of cancer organizations advised patients who received the Palliative Performance Scale to have a life expectancy of 12 months or less.
Benefits of an Accelerated Death Benefit
The accelerated death benefit is usually a tax-free lump-sum payment. Policyholders can use the money to pay off debts, cover medical expenses, drugs, experimental hospital therapy, palliative care, and nursing homes, or supplement their income. Some individuals use ADB cash to pay off their mortgages or create family financial plans. Others employ the money to cover living costs or go on vacation.
You may select from among several accelerated benefit alternatives when you get a new life insurance policy. Some insurers will pay larger accelerated benefits if you buy a group term or permanent life insurance plan. Many insurers often combine this option with existing coverage.
Some accelerated death benefits are paid in a lump sum in case of a terminal illness. Chronic illness and long-term care payments can be paid monthly.
You generally do not have to pay your life insurance premium once you receive an accelerated death benefit.
Alternatives to Accelerated Death Benefit
There are alternative options if you decide that an ADB rider isn’t for you. These include:
The cash value
If your permanent life insurance policy has a cash value component, you might be able to withdraw the accumulated money value after a sufficient length of time. With whole life and universal life insurance, you can borrow or take out funds from your permanent life insurance policy’s accumulative cash value. You will have to pay interest if you borrow money, and any remaining balance will be deducted from your survivors’ death benefit when you die.
Long-term care insurance
Long-term care insurance might be pricey, but your policy’s death benefit doesn’t limit its advantages. Depending on the terms of the policy, long-term care insurance can cover long-term care expenses for two years up to a lifetime.
A viatical settlement is a legally binding agreement between a life insurance policyholder with a life-threatening illness and a viatical settlement company. Viatical settlements enable people with a life-threatening illness to sell their life insurance policies for cash. When selling a policy in a viatical settlement, the policyholder sells it for more than the surrender value but less than market value. When you receive the funds, they’re yours. There are no strings attached and no limits on usage. Click here to want to learn about Viatical Settlement Taxation.
Pros and Cons of the Accelerated Death Benefit
The major benefit of receiving an ADB is that it allows policyholders to get a part of their death benefit before passing away. The main disadvantage of this alternative is that policyholders must be fatally ill or, in certain cases, chronically sick.
- Your beneficiaries will receive less money than you thought they would. The biggest drawback is that a life insurance benefit may not be used to pay off debt since it reduces the amount available for your beneficiaries. The amount of cash you plan to give your beneficiaries will be less than you expected. If the money from your death can be utilized to pay for day-to-day living expenses or assist your spouse or children in achieving long-term financial goals, they may benefit more from it. You could still be in debt on your mortgage, for example, and want to ensure that your spouse has enough money for your children’s college education when the time comes.
- Most life insurers charge a processing fee for accessing the death benefit ahead of time. This is important because any amount you are authorized to receive will be deducted from your policy’s premium. Learn about rates before taking advantage of an accelerated death benefit option or paying extra to add it to your policy. Each insurance company has its own set of fees.
- The tax law isn’t clear-cut. As soon as you get your faster benefits payment, a 1099 LTC will be generated. These benefit payments are tax-free in most cases. However, there are exceptions to this rule. For example, if you’re a citizen or resident of Canada who owns financial assets in a foreign country, you may be responsible for FATCA reporting. Because the threshold is $50,000 in aggregate value, an accelerated death benefit rider payout might trigger a reporting obligation.
- They could impact your eligibility for Medicaid and SSI. These public assistance systems are available to low-income individuals, and the lump sum from an accelerated death benefit might help you save money. You will be ineligible if you no longer qualify for government assistance because of your income. It’s a good idea to consult your caseworker or see a financial advisor before making any decisions.
- The accelerated death benefit is not a substitute for health or long-term care insurance. Expenses that aren’t covered by health or long-term care insurance might be paid with ADBs.
Three Main Benefits of a Viatical Settlement Over an ADB
If you are considering a choice between the accelerated death benefit and a viatical settlement, here are three key benefits that a viatical settlement offers:
- Life insurance carriers seldom approve an ADB payout for insureds who have an ADB rider on their life insurance policy because the health qualifications are very narrow and specific. For example, the insured’s life expectancy must be very short to be approved for an ADB. With a viatical settlement, a much larger life expectancy range is accepted.
- The medical underwriting process required for an ADB can take several months and, therefore, lead to a long time to get the payout from an ADB. With a viatical settlement, one can get a lump-sum cash settlement in as little as two weeks.
- ADB payouts usually provide a smaller percentage of a life policy’s death benefit than a viatical settlement. Therefore, you can usually get more from a viatical settlement versus an ADB.
Frequently Asked Questions About the Accelerated Death Benefit
Q: What is the purpose of the Accelerated Death Benefit?
A: The Accelerated Death Benefit enables terminally ill persons to use a portion of their insurance death payments before passing away. The purpose is to utilize the money to cover medical and associated costs while using the remaining funds for other necessities. In exchange, the overall death benefit is reduced.
Q: What Is an Accelerated Death Benefit Rider?
A: An ADB rider is an extra coverage or benefits linked to an insurance policy. Insurance companies can also offer accelerated death benefits as an add-on to an existing policy, allowing the insured to utilize part of their death benefit’s cash value if they are terminally ill.
Q: Is an accidental death rider the same as an accelerated death benefit rider?
A: No. Make sure to add an unintentional death provision to your life insurance coverage. Your beneficiaries may receive an extra payment if you die due to a covered accident, such as drowning or a car accident. It’s also referred to as a “double indemnity” rider because it might double the money your loved ones receive. A collision coverage policy is what this rider is most often confused with: standalone accidental death insurance that pays out only if you die in an accident. Terms and definitions are frequently conflated.
Q: What are the costs of an ADB rider on a Life Insurance Policy?
A: Many insurance companies provide ADB riders free to life insurance policyholders.
Q: How many insurance companies offer accelerated benefits?
A: Accelerated death benefits are now available from most life insurance companies. Check with your agent or broker to determine if the company you’re considering offers an accelerated death benefit rider on its policies.
Q: How do I know if my life insurance policy has an accelerated death benefit rider?
A: The easiest way to find out is to contact your agent or broker and ask them. If you don’t have an agent or broker, you can also call the customer service
Q: How much of the face value of a policy can be collected early, and how is it paid?
A: Companies make early payments ranging from 25 to 100 percent of the death benefit. The amount varies depending on the policy. If an accelerated benefit is added to a policy with no additional premium, the insurer will take the early payment away from you. ADB may pay a one-time lump sum of 75% of the death payment in the case of a terminal illness. In contrast, an LTC (Long Term Care) rider might provide a monthly benefit without restricting the overall amount paid.
Excess insurance and LTC riders can also restrict how much money is spent for particular kinds of care: For example, an LTC rider may cover up to 2% of the death benefit monthly for nursing home care but only 1% per month for home health care.
How payments are made is specified by each policy or rider. Some insurance plans allow the policyholder to choose which payment type to make. A payment might be made in monthly portions or all at once.
Q: How are accelerated benefit plans regulated?
A: Accelerated benefits are legal in all states. Model regulations for these programs have been established by the National Association of Insurance Commissioners, a lobbying organization that promotes the interests of state insurance commissioners. The model program’s rules for triggering accelerated payments are determined by the number of qualifying circumstances required. The model regulations also limit some insurance companies’ interest costs to reimburse the insurer for early payment.
Q: How can you find life insurance companies that offer accelerated benefits?
A: Over 150 organizations provide accelerated benefits, but not all plans are authorized in every state. The National Insurance Consumer Helpline (800-942-4242) can supply a list of insurers that provide accelerated benefits if you have life insurance.
The accelerated death benefit is a viable option for a person diagnosed with a terminal illness. The benefits of ADB are obvious, but one should also be aware of the potential drawbacks before signing up for a policy. Speak with your agent or broker about whether an accelerated death benefit rider is right for you.