WHAT ARE ACCELERATED DEATH BENEFITS?
Contrary to popular opinion, the sole purpose of life insurance is not only to pay out when someone dies. It can also provide money while you are still living in certain circumstances. These payments are commonly referred to as living benefits or accelerated death benefits. Most life insurance companies include this benefit as standard in their policies, but not all do.
This article explains the fundamentals of accelerated death benefits and how it works.
WHAT IS AN ACCELERATED DEATH BENEFIT?
An accelerated death benefit (ADB), also known as a living benefit, is a feature that can be added to a life insurance policy that allows the policyholder to receive cash advances against the death benefit in the event of a terminal illness. A beneficiary benefits from a life insurance policy after the owner dies. However, policy benefits can be accelerated if paid directly to a chronically or terminally ill policy owner before death. Many people who choose an accelerated death benefit have less than a year to live and use the money for treatments and other living expenses.
HOW DOES IT WORK?
If you use an accelerated death benefit rider to access life insurance money before you die, you will receive a portion of the death benefit to pay for medical care, hospital bills, or anything else you may require. Some will allow you to withdraw up to 50% of the death benefit, but the exact amount you can withdraw varies by insurer. After you die, the remainder of your life insurance benefit is distributed to your beneficiaries. Receiving funds from an ADB may impact your eligibility for Medicaid or other government assistance programs.
Any money you receive from the accelerated death benefits may or may not have federal and state tax consequences, even if they are intended to qualify as a "death benefit" under the IRS code (and thus not be taxable). This is determined partly by your life expectancy, the amount of "qualified" expenses you've incurred (for example, qualified long-term care expenses), and the amount of benefits received.
Because federal and state tax laws are subject to change, and tax laws pertaining to accelerated benefits are complex, seek the advice of a tax advisor before exercising benefits.
BENEFITS AND LIMITS
There are no restrictions on how to use accelerated death benefits. Most accelerated death benefit recipients put those funds toward the cost of caring for their loved ones, but they are not required to do so. Benefits are typically paid out in a single lump sum. Some insurance companies, however, offer monthly installments. This is an important distinction because, while either option may affect the policyholder's or their spouse's Medicaid eligibility, a lump sum payment is far more likely to do so.
Accelerated death benefits can be up to 95% of the death benefit. Typically, the insurance company establishes a maximum benefit amount based on life expectancy, and the policyholder decides how much of a financial advance they need.
HOW TO GET ACCELERATED DEATH BENEFITS(ADBs)
Many insurance companies include one or more ADBs as standard features in new life insurance policies, but they may also offer enhanced living benefits for a fee, usually calculated as a percentage of the base premium. Some providers that include an ADB (at no extra cost) will discount the acceleration of the death benefit based on a number of factors such as the insured's age, gender, and policy specifics such as cash value, and they may also charge a service fee if exercised.
Although ADBs are most commonly associated with permanent life insurance policies such as whole life and universal life insurance, some insurers include them in term life policies or make them available for purchase. ADB riders are typically offered when purchasing a new life insurance policy, but some carriers allow you to add one to existing coverage.
If you have a policy with an accelerated death benefit, you must meet specific requirements in order to activate it. Typically, after being diagnosed with a terminal illness or certain chronic conditions, you can show proof from your doctor to your insurance provider in order to begin using your accelerated death benefit (also known as a terminal illness rider). In other words, if a medical professional has told you that your life expectancy is significantly reduced, you may be able to use your policy's accelerated death benefit rider. To use an accelerated death benefit, most insurance companies require a life expectancy of six to twenty-four months (as attested by a medical doctor).
You can use your life insurance policy to pay for long-term care expenses or other needs if you have an accelerated death benefit. However, if you withdraw the money before your death, your beneficiaries will receive less when you die. Before applying for ADB disbursement, discuss the process and implications with your insurance agent and a qualified tax advisor.