What Is the Purpose of an Accelerated Death Benefit?

Life insurance traditionally provides a financial safety net for beneficiaries after the policyholder’s passing. This essential protection offers funds to cover expenses, replace income, and ensure financial stability for loved ones during a difficult time. However, life’s uncertainties can present significant financial challenges even before death, particularly when facing severe health issues. Accelerated death benefits offer a solution to this dilemma, allowing policyholders to access a portion of their policy’s death benefit while still living. This article explores these benefits, how they function, and important considerations for their use.

Understanding Accelerated Death Benefits

An accelerated death benefit (ADB) is a feature, often included as a rider, within a life insurance policy that allows the policyholder to receive a portion of their death benefit prior to their death, under specific qualifying circumstances. These “living benefits” provide financial relief to individuals facing serious health conditions. Funds accessed through an ADB can help alleviate financial strain associated with medical care, lost income, or end-of-life expenses.

The conditions that trigger an ADB payout vary, but generally fall into a few common categories. Terminal illness is a frequent trigger, where a physician certifies that the policyholder has a limited life expectancy, often defined as 12 or 24 months. Chronic illness is another common trigger, meaning the policyholder is unable to perform a certain number of Activities of Daily Living (ADLs), such as bathing, dressing, eating, continence, toileting, or transferring, for a specified period, usually 90 consecutive days, or has a severe cognitive impairment requiring substantial supervision. Some policies may also include critical illness as a trigger, providing a payout upon diagnosis of specific severe conditions like a heart attack, stroke, or certain types of cancer. These riders are frequently included at no additional upfront cost.

How Accelerated Death Benefits Function

Once a policyholder meets the qualifying conditions for an accelerated death benefit, they can typically access a percentage of their policy’s death benefit, which can range from 25% to 100%. Insurers often impose a maximum dollar amount, such as $250,000 to $1 million. The specific amount available depends on the policy’s terms, the insurer, and the severity of the illness.

Any amount accessed through an ADB directly reduces the remaining death benefit paid to beneficiaries upon the policyholder’s death. For instance, if a $500,000 policy has $100,000 accelerated, the beneficiaries would later receive $400,000. For permanent life insurance policies that accumulate cash value, accessing an ADB can also affect the policy’s cash value and may impact future premium payments, as the policy’s overall value and death benefit are reduced.

From a tax perspective, accelerated death benefits are generally treated favorably under federal law. Amounts received by a terminally ill individual are typically excluded from gross income. For chronically ill individuals, benefits used for qualified long-term care expenses are also generally tax-free, though there may be limits on the excludable amount if benefits exceed a certain per diem limit. These tax rules are primarily governed by Internal Revenue Code Section 101. However, it is advisable to consult with a tax professional, as individual circumstances and state tax laws can vary.

Key Considerations for Accelerated Death Benefits

Before accessing an accelerated death benefit, medical documentation and certification from a licensed physician are required to prove a qualifying condition. The insurance company will thoroughly review these documents to confirm eligibility based on the specific criteria outlined in the policy.

The application process typically involves contacting the insurer, completing specific claim forms, and submitting the required medical records. Insurers may also require consent from any assignees or irrevocable beneficiaries on the policy before approving the payout. Policyholders should be prepared to provide detailed medical evidence to support their claim.

Accessing these benefits has financial implications for beneficiaries. Drawing down a portion of the death benefit reduces the inheritance intended for loved ones, which requires careful consideration of their future financial needs. While ADBs provide financial support during illness, they are one of several options; others might include long-term care insurance or critical illness insurance. Policyholders should consult with a financial advisor or their insurance company to understand their policy’s terms and the financial consequences of using an accelerated death benefit.