What Is an Accelerated Death Benefit?

Understanding Accelerated Death Benefits

An accelerated death benefit provides a policyholder with the ability to access a portion of their life insurance policy’s death benefit while they are still living. This provision typically functions as a rider, or an added feature, to a standard life insurance policy. Its primary purpose is to offer financial relief and support to individuals facing severe health challenges, enabling them to cover medical expenses or other costs during a difficult period.

These benefits are often referred to as “living benefits” because they allow the insured to utilize funds from their policy during their lifetime. An accelerated death benefit provides an advance on the traditional life insurance payout. This advance can be a percentage of the total death benefit, often ranging from 25% to 100%, depending on the insurer and policy terms.

Several common types of accelerated death benefits exist, each triggered by different health conditions. A terminal illness benefit allows access to funds if a policyholder is diagnosed with an illness expected to result in a short life expectancy. Chronic illness benefits address situations where an individual requires long-term care due to an inability to perform daily activities. Critical illness benefits are available upon diagnosis of specific severe conditions such as a heart attack, stroke, or cancer.

Qualifying Conditions

Eligibility for accelerated death benefits hinges on meeting specific medical and health criteria outlined within the policy. For a terminal illness benefit, a physician’s certification that the insured has an illness expected to result in death within a specified timeframe, typically 12 to 24 months, is required.

Chronic illness benefits are typically triggered when an individual is unable to perform a certain number of Activities of Daily Living (ADLs), usually two out of six, without substantial assistance. These ADLs commonly include bathing, dressing, eating, toileting, transferring, and continence. Severe cognitive impairment, such as that caused by Alzheimer’s disease, which requires substantial supervision, also frequently qualifies.

Critical illness benefits become available upon the diagnosis of specific severe medical conditions listed in the policy. Common examples include a major heart attack, stroke, life-threatening cancer, major organ transplant, or kidney failure. Policy language will specify the exact diagnostic criteria that must be met for a payout. Some policies may also include other conditions, such as permanent confinement to a nursing home or admission to hospice, as qualifying events.

Impact on Your Life Insurance Policy

Utilizing an accelerated death benefit directly impacts the remaining value of the life insurance policy. Any amount received as an accelerated benefit reduces the death benefit that will ultimately be paid to the designated beneficiaries. For example, if a policy has a $500,000 death benefit and $100,000 is accelerated, only $400,000 would remain for beneficiaries.

In some instances, insurers may deduct administrative fees or an interest charge from the accelerated amount. While many accelerated death benefit riders are included at no additional premium cost, some policies may apply a service charge or an interest factor when the benefit is activated.

From a tax perspective, accelerated death benefits are generally considered tax-free under certain conditions, particularly if the insured is terminally ill. Internal Revenue Code Section 101 outlines that accelerated death benefits paid to a terminally ill individual are usually excluded from gross income if a physician certifies the individual is expected to die within 24 months.

For chronically ill individuals, accelerated benefits can also be tax-free if used for qualified long-term care expenses. However, there may be limits on the amount that can be received tax-free if not used for qualified long-term care. Individuals considering an accelerated benefit should consult with a tax advisor. Receiving a substantial accelerated benefit could potentially impact eligibility for needs-based government programs like Medicaid, as the funds may be considered an asset.

Applying for the Benefit

The process of applying for an accelerated death benefit typically begins with contacting your life insurance provider. The insurer will then provide the necessary claim forms and explain the specific documentation required for the application.

Central to the application is providing comprehensive medical documentation that substantiates the qualifying condition. This usually includes statements from attending physicians, medical records, and diagnostic test results.

Upon submission of all required paperwork, the insurance company will review the claim to verify eligibility according to the policy terms. This review process can take several weeks, depending on the complexity of the case and the insurer’s procedures. Once approved, the benefit is typically paid out as a lump sum, though some policies may offer the option of installment payments.

The funds are generally disbursed directly to the policyholder, or to a designated recipient if authorized. Policyholders should ensure they understand the payout method and any remaining policy obligations, such as continued premium payments, before finalizing the benefit activation.