What Is an Accelerated Death Benefit Rider?

An accelerated death benefit (ADB) rider is a feature included with a life insurance policy, allowing the policyholder to access a portion of their death benefit while still alive. This provision offers funds to help manage expenses from serious illness, especially those not covered by health insurance.

Understanding Accelerated Death Benefit Riders

Accelerated death benefit riders are add-ons to an existing life insurance contract. They activate under specific qualifying conditions, which vary by insurer and policy. The most common conditions are terminal, chronic, and critical illness, each with distinct criteria.

A terminal illness requires a physician’s certification that the policyholder has a life expectancy of 24 months or less. This rider is often straightforward to activate if the prognosis is clear.

A chronic illness typically involves the policyholder being unable to perform at least two Activities of Daily Living (ADLs) without substantial assistance for a period, often 90 days. Severe cognitive impairment requiring substantial supervision can also qualify. Common ADLs include:
Bathing
Dressing
Eating
Toileting
Transferring
Continence

A critical illness allows access to benefits upon diagnosis of specific severe medical events. Examples often include heart attack, stroke, life-threatening cancer, major organ transplant, or kidney failure. The specific list of qualifying critical illnesses is determined by the insurance company and outlined in the policy.

Financial Aspects of Accelerated Benefits

Accessing an accelerated death benefit reduces the remaining death benefit payable to beneficiaries. The amount available for acceleration is typically a percentage of the policy’s death benefit, often ranging from 25% to 100%, with many insurers capping it around 50% or a maximum dollar amount, such as $250,000.

Insurers may impose administrative fees or charges for processing the accelerated payment, which can be deducted from the benefit. Some policies apply a processing fee or an interest charge when the benefit is utilized, rather than an upfront premium for the rider.

For permanent life insurance policies with cash value, accessing an accelerated benefit also reduces the policy’s cash value. Policyholders are generally required to continue paying premiums to keep any remaining coverage in force. The benefit payout can be received as a lump sum or through periodic installments.

Taxation of Accelerated Benefits

The taxation of accelerated death benefits is governed by federal law, specifically the Health Insurance Portability and Accountability Act (HIPAA). Under HIPAA, benefits received by an individual certified as terminally or chronically ill are generally excluded from gross income and are not taxable.

For tax purposes, a terminally ill individual is certified by a physician as having an illness expected to result in death within 24 months. A chronically ill individual is certified by a licensed healthcare practitioner as being unable to perform at least two ADLs for at least 90 days due to a loss of functional capacity, or requiring substantial supervision due to severe cognitive impairment. For chronically ill individuals, benefits must be used for qualified long-term care expenses to remain tax-free.

There are specific situations where accelerated benefits may become taxable. If the amount received by a chronically ill individual exceeds the daily federal per diem limit for long-term care expenses (for example, $420 per day in 2024), the excess amount may be taxable.

Benefits may also be taxable if the recipient does not meet the IRS definitions of terminally or chronically ill, or if any interest component is included in the payout. If the policy is sold to a third-party viatical settlement provider, different tax implications may apply. Insurers issue Form 1099-LTC to report these payments. Consulting a tax professional is advisable for personalized guidance.

Accessing Your Accelerated Benefit

The process of accessing an accelerated death benefit typically begins by notifying the life insurance company of the intent to file a claim. This initial contact allows the insurer to provide the necessary forms and outline specific requirements. The policyholder or their representative will then need to gather comprehensive medical documentation. This documentation generally includes statements from a licensed physician confirming the qualifying condition, such as a terminal diagnosis, chronic illness, or critical illness, along with supporting medical records and prognosis reports.

After the required forms are completed and all medical evidence is submitted, the insurance company will review the claim to verify that the policyholder meets the specific criteria outlined in the rider. This review process ensures compliance with the policy’s terms and applicable regulations. The timeframe for approval and payment can vary, but once approved, the benefit is often disbursed as a lump sum.

It is important to understand that the exact procedural steps can differ among insurance providers. Policyholders should refer to their specific policy documents or contact their insurer directly for precise instructions regarding the application process, required forms, and expected timelines. Timely submission of accurate and complete documentation helps facilitate a smoother and more efficient review by the insurance company.