Table of Contents
- What is Accelerated Death Benefit?
- How Accelerated Death Benefits Work
- Types of Accelerated Death Benefits
- Am I Eligible for an Accelerated Death Benefit?
- How Much of an Accelerated Death Benefit Can You Advance?
- Are Accelerated Death Benefits Taxed?
- Alternatives to Accelerated Death Benefits
- Pros and Cons of Accelerated Death Benefits
- Key Takeaways
What is an Accelerated Death Benefit?
An Accelerated Death Benefit (ADB), also known as a terminal illness rider, is a type of life insurance policy provision which allows policyowners with shortened life expectancies due to a terminal illness to access a portion of their death benefit while still living. For this reason, some insurers refer to ADBs as living benefits riders. While news of a terminal illness or other conditions can be extraordinarily painful and raise innumerable concerns about your and your loved ones’ financial future, an ADB can be a valuable option for those in need of liquidity.
ADBs include terminal, critical, and chronic illness riders. To qualify for these living benefits, policyowners must meet certain health criteria; information that your physician can assist with.
Policyowners are free to use proceeds from Accelerated Death Benefits however they see fit. Oftentimes, they put this money toward expenses such as:
- Medical costs not covered by their healthcare provider
- Nursing homes and assisted living facilities
- Home care and hospice costs
- General family and life expenses
It is important to note, however, that there are often withdrawal limits on ADBs. Policyowners seeking more money in exchange for their policy may want to consider a life settlement.
How Does an Accelerated Death Benefit Rider Work?
Accelerated Death Benefits are deducted from a policy’s death benefit—or the amount set aside for a beneficiary. If you qualify for an ADB, you can determine how much of your death benefit you would like to leave for your beneficiary and how much you would like to withdraw—as long as the amount does not exceed the limit set by your insurer.
For many insurers, the withdrawal limit is around 50 percent, or up to $250,000. The limit can be higher, though, depending on your policy. Prudential, for instance, allows 100 percent of the death benefit to be withdrawn in certain policies, but this is rare and corresponds with having a higher premium. If you do not withdraw the entire amount of the death benefit, you will have to continue paying premiums to maintain your policy. Also note that you may not qualify for an ADB if the face value of your account is below $25,000.
In addition to choosing your withdrawal amount—within your insurer’s limits—you can decide whether to receive the accelerated benefits rider as a lump sum or as incremental payments. If your policy did not include an ADB at the time of purchase, you can typically add one as a rider, or optional provision. This rider may come at a low cost.
How Do Viatical Settlements Play a Role?
Viatical settlements (the sale of a life insurance policy to a third party for cash) are an alternative route for policyowners who would like to access their death benefits but can no longer afford their premiums. Like accelerated death benefits, viatical settlements are geared toward policyowners with terminal illnesses. However, settlements generally allow a policyowner to walk away with more money than if they opted for an ADB because they are transferring their policy—including its death benefit and premium payments—to the licensed settlement provider.
What is the Purpose of Having an Accelerated Death Benefit?
The purpose of having an Accelerated Death Benefit is twofold. First, having an Accelerated Death Benefit gives the policyowner tax-free access to some of their death benefit early if they unexpectedly fall ill in order to cover treatment costs. This safety net can help cover unforeseen medical costs and other expenses while the policyowner is still alive. More importantly, though, having an Accelerated Death Benefit can give the policyowner peace of mind during their years of coverage. Knowing they have access to part of the policy they’ve paid into over the years during a time of extreme need can help policyowners feel like they’re getting more value and utility out of their life insurance policy.
What Types of Accelerated Death Benefits Are Available?
Both Term and permanent life insurance policies, such as Whole Life, Universal Life, and others, can include Accelerated Death Benefits. The varieties of Accelerated Death Benefits include:
- Terminal illness coverage. Policyowners who have been given a life expectancy of less than 12 or 24 months, certified by a doctor.
- Critical illness coverage. Policyowners who have a serious illness that may shorten their life expectancy can qualify for this coverage.
- Chronic illness coverage. Typically goes into effect when the policyowner develops an illness that prevents them from performing at least two daily life activities or leaves them cognitively impaired.
- Long-term care coverage. Allows policyowners who have been living in a long-term care facility for six months or more to access living benefits.
You can determine if your policy has an Accelerated Death Benefit rider by reading your policy documents or by contacting your insurance company. It may be possible to add one to your existing policy for a low cost, but this is often difficult to do unless you are in excellent health. If your policy does not have an Accelerated Death Benefit, a viatical settlement is another convenient way to receive money in exchange for your life insurance policy.
Am I Eligible for an Accelerated Death Benefit?
In order to qualify for an Accelerated Death Benefit, you must meet the health criteria set by your insurer. Typically, you can qualify if your life expectancy is less than 12 or 24 months, and is certified by a doctor.
Some policyowners don’t have a terminal diagnosis, but have a critical or chronic illness that has shortened their life expectancy and significantly raised their living expenses. Depending on the policy, these policyowners may also qualify for an ADB.
ADB eligibility varies from policy to policy, but there are some commonalities among them. Depending on your insurance, you can qualify for living benefits if you fall into one of the following categories:
Terminal Illness
Terminal illness is defined as having an incurable disease that will result in death. If you have a terminal illness, you can access your Accelerated Death Benefit when your life expectancy is under one or two years, depending on your policy. Insurers also require a certificate from a doctor validating your condition. The insurer may not allow living benefits for term policyholders within 18 months of the end of their policy. Types of terminal illness include:
- Advanced cancer
- Advanced heart disease
- Liver disease
- Pulmonary Disease
- Dementia
- HIV/AIDS
Critical Illness
Critical illnesses pose serious health concerns and may shorten your life expectancy, but they are possible to recover from. Insurers often place higher premiums on critical illness coverage because these illnesses are more common than terminal ones. Critical illnesses include:
- Cancer
- Stroke
- Heart attack
- Major organ transplant
- Parkinson’s disease
- Amyotrophic lateral sclerosis
- Alzheimer’s disease
Chronic Disease
A chronic disease is a long-term health condition that lasts over one year and, though it can be managed, is often incurable. Accelerated Death Benefits can help cover recurring medical costs for treatment throughout the progression of the disease. Chronic illnesses include:
- Diabetes
- Heart disease
- Respiratory diseases
- Cancer
- HIV
Long-Term Care
For a variety of reasons, you may end up in a long-term care facility like a nursing home or assisted living program. If you have been confined to a long-term care facility for at least six months and will be living there indefinitely, you may qualify for living benefits.
How Much of an Accelerated Death Benefit Rider Can You Advance?
The amount of your death benefit that you can advance depends largely on your policy and the face value of your account. If your policy has a face value—or death benefit—of $100,000 and your insurer has a withdrawal cap of 75 percent, you can withdraw $75,000 and the remainder will be left for your beneficiary. Note, however, that the $75,000 of accelerated death benefit may be subject to administrative fees.
Are Accelerated Death Benefits Taxed?
Accelerated Death Benefits are tax-free, just like death benefits. However, there are select circumstances where policyowners could find themselves with unexpected tax bills on their Accelerated Death Benefits—particularly if they have financial assets in a foreign country. Because people with financial assets outside of the United States need to report income of over $50,000, they may need to report receiving an accelerated death benefit for tax purposes.
Receiving an ADB, particularly incremental ADB payments, could impact your eligibility for Medicaid or other governmental support. Check with your financial advisor to ensure that an ADB payment will not jeopardize your—or your family’s—government-provided health coverage.
What Are The Alternatives to Accelerated Death Benefits?
Depending on your situation, a life settlement may be a better option than an Accelerated Death Benefit. A life settlement will likely provide you with more money than an ADB, making them a valuable alternative for those looking to maximize the cash return on their policy.
If you don’t need life insurance coverage anymore, a life settlement can free you from the burdensome premium payments that you’d still be obligated to pay after receiving an ADB. Many life settlement providers also offer competitive quotes, compared to the nonnegotiable quotes associated with ADBs.
Another reason to choose a life settlement is if your policy doesn’t have an Accelerated Death Benefit rider. If you don’t have an ADB provision and you’ve recently received a terminal diagnosis, you can opt for a viatical settlement, a type of life settlement specifically geared toward policyowners with a terminal illness.
What are the Pros and Cons of Accelerated Death Benefits?
Acquiring an accelerated death benefit is a good option for policyowners who need that money now to help pay for medical expenses. They’re aimed specifically toward policyholders who are chronically or terminally ill, with a life expectancy of only a few more years. There are many benefits to ADBs, but there are also a few restrictions that make getting one challenging—not to mention the potential impact on beneficiaries down the line.
Pros
The main pro to getting an accelerated death benefit is that it allows policyholders to receive a portion of their death benefit before they pass. This is useful for people who are suffering from terminal illness and need the money to help keep them comfortable during their final stage of life. Policyholders who get an ADB can use the money however they want, with no restrictions. Most people use it to pay for medical procedures, hospice, assisted living, or nursing home care. Another pro to ADBs is that they aren’t taxed as income, so policyowners will get the exact amount of money they expect to. Although the ADB total is subtracted from the total death benefit, beneficiaries do still receive the remaining amount.
Cons
The cons for getting an ADB mainly involve the restrictions and limitations there are in determining who is eligible to receive one. Policyowners have to be terminally ill with only a few years left to live. The exact number of years varies based on the insurance company, but typically life expectancy has to be two years or less. Since ADBs are a relatively new concept, this also means that many current policies don’t include them as an option. Policyowners can talk to their insurance companies about getting one, but it will be added in the form of a rider, which costs money. The amount of money a policyholder receives can also change their financial status, meaning they could be disqualified from Medicaid or Supplemental Social Security benefits. Another accelerated death benefit provision is that getting an ADB reduces the final death benefit amount, so beneficiaries will receive less money than they may have originally expected. This is why many people choose to get a life settlement instead of an Accelerated Death Benefit.
Key Takeaways for an Accelerated Benefits Rider
An Accelerated Death Benefit rider serves as crucial financial cushions for many policyowners, providing them with money for medical and living expenses after life-altering diagnoses. If you think you may qualify for an accelerated death benefit rider, or simply want to learn more, below are a few key takeaways:
- Accelerated Death Benefits are living benefits paid to policyowners who meet certain health criteria.
- ADBs are deducted from death benefits, reducing the payout a beneficiary receives after the death of the insured.
- ADBs can be added to existing policies through an optional rider.
- Policyowners still have to meet premium payments after receiving an ADB lump sum or increment.
- Accelerated Death Benefit eligibility is determined by a number of factors—including stage or type of illness (e.g., terminal illness, chronic illness, critical illness, and confinement to a long-term living facility).
- ADBs are not taxable, except under a small number of circumstances. Contact your financial advisor regarding any tax concerns.
- Viatical settlements (the sale of a life insurance policy to a third party for cash) may be a better option for policyowners nearing end of life due to an illness. They often offer the policyowner more money than an ADB provision, while also freeing them from costly premium payments.
- Insurers typically do not allow ADBs for policies with a face value below $25,000.
- Withdrawal caps for ADBs vary significantly across insurers—so be sure to check your policy’s terms.
If you are considering an alternative to accelerated death benefits, Coventry can help you secure a cash settlement for your life insurance policy. Contact Coventry for assistance regarding the best options for you and your family.
Coventry Direct does not offer tax or legal advice. This material has been prepared for informational purposes only and should not be relied upon for tax or legal advice. Coventry Direct urges you to consult with your own tax or legal advisors before entering into any transaction.
