Life insurance is designed to provide financial support to those who rely on you in the event of your unexpected death.
However, if you have a critical illness, an accelerated death benefit rider, which is a popular policy provision, may be able to help you cover medical fees and other expenses while you are still living. Also called a “living benefit rider” or “accelerated living benefits rider,” it can make a difficult moment a little easier.
What’s an accelerated death benefit?
If you are sick, you can collect a portion of the payoff from your life insurance policy early through an accelerated death benefit, or ADB. This function is intended to help you meet expenses such as medical bills or the cost of care, but you can usually spend the money as you like.
The eligibility conditions for an expedited death benefit differ by insurer. Typically, you’ll need to show that you have a terminal illness with a life expectancy of 24 months or less.
Some insurers also let you to claim for accelerated death payments in the following situations:
- You’ve been diagnosed with a critical or chronic condition that could reduce your life expectancy. Cancer, heart attack, heart illness, stroke, kidney failure, coma, paralysis, and amyotrophic lateral sclerosis, sometimes known as ALS, are all common topics.
- You have a catastrophic illness that requires extraordinary treatment, such as an organ transplant or continuous life support.
- You require long-term care because you can no longer do two or more “activities of daily living” alone. These include showering, eating, dressing, using the restroom, changing positions, and managing your bladder or intestines.
- You are permanently confined to a nursing home. Depending on your insurer, you may be eligible to access your policy’s payout if you have been in a nursing home for six months and are likely to stay there.
Do I have to pay for accelerated death benefits?
Most insurers include expedited death benefits for terminal conditions as a standard element of their plans, so there is no additional expense.
Some insurers provide benefits for catastrophic and critical illnesses, as well as long-term care, as optional life insurance riders, which means you’ll pay a higher premium if you include them in your policy. The cost varies by insurer.
If you use the accelerated death benefits, your insurance will most certainly charge an administrative fee. The fee will be taken from the amount you expect to receive.
If you have an older policy, you should check to see if your life insurance provider has included an accelerated death benefit in your coverage. In recent years, many insurers have added this rider to existing plans for free.
How much money can I collect early?
The amount you can obtain is regulated by your insurer, the face value of your insurance, and the state where you live. Most insurers allow you to withdraw 25% to 95% of the death benefit.
If you have permanent life insurance, your insurer will lower the death benefit by any outstanding loans on your policy. Once your claim is validated, you will usually receive a lump sum payout.
What to know about accelerated death benefits
While expedited death benefits are advantageous in many cases, they are not without downsides.
They may influence your eligibility for Medicaid and Supplemental Security Income. These public assistance programs are available to low-income Americans, and the lump payment from an expedited death benefit may alter your financial situation. If so, you may no longer be eligible for government assistance. Before making any decisions, it’s best to consult with your caseworker or financial counselor.
Your beneficiaries will get less money than you expected. Because accelerated death benefits are deducted from your policy’s death benefit, your life insurance beneficiaries will not get the entire amount of money when you die. If you want to ensure that your loved ones have enough money to cover the mortgage or other living expenses, you might choose to receive a smaller percentage of the payout early — for example, 50% of your death benefit rather than 80%.
The tax law is not clear-cut. When you obtain accelerated death benefits, you must submit the payments to the Internal Revenue Service. Your insurer will issue you a form 1099-LTC with the total amount you were paid. Most payments are tax-free, however there are certain exceptions. For example, if you prefer to receive the ADB payment in installments rather than in one lump sum, those payments may accrue interest, which might be taxed as income.
They do not substitute health or long-term care insurance. ADBs can aid with expenses that are not covered by health or long-term care insurance. However, because they do not provide complete coverage, they cannot be used to replace those plans.
Is an accelerated death benefit rider worth it?
While this rider has limitations, it can assist you in getting your affairs in order and reducing financial hardship for you and your loved ones while you are ill.
If your insurer includes an expedited death benefit as a standard feature, you have nothing to lose by taking it. If you need to buy it as an add-on, consider the cost and effects before making a decision.
You could forego the rider if you have enough savings to meet unforeseen medical expenditures and expenses.
Alternatives to consider
While it may be comforting to know that you can use your life insurance policy if you become ill, accelerated death benefits are not suitable for everyone. You might want to look into these alternatives instead:
- Take advantage of the cash value of your permanent coverage. If you’ve had cash value life insurance for a while, you may have saved enough money to take out a loan on your policy. If you decide you no longer need coverage, you can surrender your policy and receive cash. In either case, the cash could assist you pay for medical and living expenditures.
- Consider buying long-term care insurance. If you become chronically or terminally sick, long-term care insurance may kick in and allow you to avoid depleting your life insurance or assets. It provides coverage for long-term care expenses, such as a nursing home, skilled nursing facility, adult day care, or a health aide for in-home care, for periods ranging from two to a lifetime.
- Look into life insurance settlement. If you are 70 or older, you may be entitled to sell your life insurance policy. These transactions are primarily handled by brokers, with universal life insurance plans being the most prevalent purchase.
