Life insurance policies are usually paid out when the policy owner dies. But there are certain instances where your policy may provide you with a payout while you are still alive. Your life insurance policy may have a provision for an Accelerated Death Benefit – which is an insurance rider or add-on that can provide “living benefits” to the policyholder.
The Accelerated Death Benefit or ADB is a common feature of most life insurance policies that allow the policyholder to receive a part of their death benefit payment. The ADB is an add-on, also known as a rider, to the life insurance policy where the settlement can be used in the case of a qualifying terminal illness or a chronic illness.
The accelerated death benefit provision in a policy is also known as “terminal illness benefit” or as a “living benefit rider”. In most cases, a person with a terminal illness can qualify for ADB when their life expectancy is between six months to two years. In the case of chronic illnesses, the policyholder of the life insurance policy can qualify for ADB regardless of life expectancy.
The amount the policyholder receives can vary depending on the guidelines of their life insurance company, but the accelerated death benefit amount is usually between 50-80% of the face value of the policy. If you have taken out a loan against your permanent life insurance, then the ADB you receive will have the loan amount deducted.
The primary purpose of a life insurance policy is to ensure that the beneficiaries of the policyholder are covered financially after the policyholder passes. But choosing a life insurance policy with an accelerated death benefit rider will let the policy owner access a portion of the policy benefits while they are still alive, to pay for the medical costs of a terminal/chronic illness, for long-term care, or for end-of-life comfort.
Since accelerated death benefits only pay out a portion of the death benefit, the beneficiaries of the policyholder may still receive a part of the policy in case the policyholder passes away.
If you have a life insurance policy where there is no provision for accelerated death benefits, some insurance companies may make accelerated death benefits available as long as you have been diagnosed with a terminal or any other illness that has considerably reduced your life expectancy. If your illness has impacted your ability to perform normal activities or requires long-term care or even a life-saving treatment such as an organ transplant – then you may have the eligibility for ADB.
The provision for accelerated death benefits is usually meant for policyholders with terminal illness, where the life expectancy of the policy owner is seriously impacted. To qualify for ADB, the insurance company will require a diagnosis and certification from a medical professional that the policy owner is terminally ill and will not survive beyond two years, although some insurance companies may require the life expectancy of the policy owner to be less than six months.
While terminal illness may be the most common reason for providing ADB, some insurance companies also offer ADB for chronic illness, critical illness, and long-term care, especially for the elderly.
To qualify for ADB for a chronic illness, you will need to be diagnosed by a medical professional who certifies that you are unable to perform two or more of the following activities of daily living: bathing, eating, getting dressed, using the restroom, continence, and moving about.
If you have an illness that is survivable but leaves you with medical bills or a shorter life span, then you may qualify for ADB. Usually, insurance providers offer ADB in the case of critical illnesses or catastrophic illnesses such as cancer, heart attack/heart stroke, organ transplant, organ failure, paralysis, or coma.
The provision for ADB can also be used when the policy owner needs long-term care. This could include the use of a nursing home or eldercare facility. The insurer may advance the payment of your death benefit if you are expected to require long-term care for a period of over six months, or if you have to remain in a nursing home permanently.
If you receive an accelerated death benefit payment, then it can render you ineligible for Medicaid or Supplemental Security Income.
If you qualify for accelerated death benefit, then you will receive a lump sum payment to cover your medical bills as well as other expenses. If you receive ADB against your life insurance policy, then you may use the payment towards hospice care, home care, a nursing home, hiring a private caretaker, or paying off your mortgage, car loan, or any other debt.
Depending on your circumstances, you may or may nor have to pay taxes on your accelerated death benefits. If your life expectancy from your medical condition is less than two years, then ADB payment is exempt from taxes. But there are instances where you might have to pay taxes.
Usually, an accelerated death benefit is paid out as a lump sum that is not subject to taxes. However, if you choose to receive the payout in increments, and the incremental payouts accumulate interest, then it can be taxed. You may also need to pay estate tax that includes payout from your life insurance and death benefits, if the total value of your estate including all your assets exceeds $11.7 million.
Most insurance companies offer accelerated death benefits at no additional cost to your base premium, but some insurance providers may require an additional payment. You may also get charged with an administrative/service fee to receive your ADB.
You should consider the following before choosing an accelerated benefits rider for your life insurance policy:
Your beneficiaries or loved ones may receive little or no payout from your policy’s death benefit.
It is not a substitute for health insurance or long-term care insurance coverage.
You may end up paying taxes on your ADB
payout, so consult your tax advisor before opting for an ADB rider.
It may affect your Medicaid
eligibility, since the payout can be considered as income.
A: If you have received a smaller portion of your death benefits, then your beneficiaries will receive the rest of the policy amount.
A: No, ADB payments can be used for medical expenses in an emergency, but they are not the same as health insurance or long-term care insurance.
A: No. With ADB, your loved ones still remain the beneficiaries of your death benefits. With a viatical settlement, the third party you sell your policy to becomes the beneficiary of any death benefits payment.