What Is an Accelerated Benefit in a Life Policy?

Life insurance policies pay beneficiaries after the insured’s death. An accelerated benefit, also known as a living benefit, allows policyholders to access a portion of their life insurance death benefit while still alive. It provides financial relief for individuals facing significant health challenges and associated costs. This option can be included directly in a policy or added as a rider, offering flexibility for policyholders to manage unforeseen expenses.

Understanding Accelerated Benefits

Accelerated benefits help policyholders manage severe health setbacks. They alleviate financial strain from illnesses requiring extensive medical care or long-term support. These benefits are advanced from the policy’s death benefit, reducing the amount paid to beneficiaries later.

These benefits are typically offered through riders or provisions. A terminal illness rider allows access to funds if a policyholder is diagnosed with a condition expected to result in death within a specified period, often 12 or 24 months. A chronic illness rider provides benefits if the insured cannot perform a certain number of daily living activities (ADLs) or experiences severe cognitive impairment, indicating a need for long-term care. Critical illness riders offer a lump sum if the policyholder is diagnosed with a severe medical condition, such as a heart attack, stroke, or cancer.

Qualifying Conditions and Eligibility

Eligibility for accelerated benefits depends on specific medical conditions and criteria. For a terminal illness, insurers typically require a physician’s certification that the policyholder has a life expectancy of 24 months or less, though some policies may specify 12 months or even six months.

For chronic illness, qualification depends on the inability to perform a certain number of Activities of Daily Living (ADLs). These activities commonly include:

• Bathing
• Dressing
• Eating
• Continence
• Toileting
• Transferring

Severe cognitive impairment, such as due to Alzheimer’s disease or dementia, can also qualify. For critical illness benefits, policies specify a list of covered conditions, which frequently include major health events such as:

• Heart attack
• Stroke
• Life-threatening cancer
• Kidney failure
• Need for major organ transplants

A licensed physician must provide medical certification for the diagnosis and prognosis, fulfilling the policy’s requirements for accessing these benefits.

Accessing Accelerated Benefits

Accessing accelerated benefits begins with the policyholder or their authorized representative contacting the insurance company. The insurer provides claim forms and details the required documentation.

Key documents include a completed claim form, an attending physician’s statement, and comprehensive medical records. The physician’s statement must certify the qualifying medical condition and, for terminal illness, the life expectancy. Once submitted, the insurance company reviews the claim to verify eligibility. Approval timelines vary by insurer but involve assessing medical evidence to ensure compliance with policy terms. Upon approval, the benefit is usually disbursed as a lump sum, though some insurers may offer periodic payments.

Financial Considerations

Accelerated benefits have direct financial implications for policyholders and beneficiaries. The amount available is typically a percentage of the policy’s death benefit, often ranging from 25% to 100%, with many insurers setting a maximum cap, such as $500,000 or $1,000,000. This payment reduces the remaining death benefit paid to beneficiaries. If the entire death benefit is accelerated, there may be no remaining funds for beneficiaries.

Insurers may apply administrative fees or interest charges, deducted from the payment. These fees can vary but are typically a flat amount, for instance, between $100 and $300, or a percentage of the accelerated amount. For tax purposes, benefits received by a terminally ill individual (certified with a life expectancy of 24 months or less) are generally excluded from federal gross income under Internal Revenue Code Section 101. For chronically ill individuals, benefits are tax-free if used for qualified long-term care expenses, but amounts exceeding specific IRS per diem limits, such as $420 per day in 2024, may be taxable. Policyholders typically receive IRS Form 1099-LTC for these payments. Consulting a qualified tax professional is advisable to understand individual circumstances and potential tax liabilities.