How Does An Accelerated Death Benefit Work?

by Jeff Rose on February 27, 2017 · 1 comment

in Term Life Insurance

accelerated death benefit

Life insurance is an incredible investment. In fact, it’s one of the best ways to ensure that your loved ones get the insurance protection that they need. It’s a great way provide your family with the money that they need if something tragic were to happen to you. But, what if you end up with a chronic condition that drains your bank account?

For anyone with a terminal illness, an accelerated death benefit can be savior.

An accelerated death benefit is an insurance benefit that pays out while the insured is still alive.

Usually, only people who are suffering from terminal illnesses are eligible for accelerated death benefits.

This is also called a living benefit.

What Is A Living Benefit?

A living benefit can be added to an insurance policy before or after purchase. With this benefit, patients who have a terminal illness can access part of their benefits before their death. Initially, when this benefit was first created, it was offered only to people with HIV/AIDS.

Overtime, it was offered to people who suffered from kidney failure, cancer, and other terminal illnesses. Medical expenses for a terminal illness can be very expensive, and there are also living expenses that the terminally ill have to pay as well. A living benefit can aid with all of these expenses and can be of a great help to those who have terminal illnesses.

Many insurance companies offer a living benefit as a rider in some of their life insurance policies. It is commonly included in permanent life insurance policies. There are many different packages and payment options for living death benefit. You can receive the death benefit if you already have a terminal disease or if you contract one in the future.

Not everyone wants to think of the possibility of contracting a terminal disease, but for some, a living benefit may be something they wish to add to their policy. You will receive a percentage of the death benefits depending on the insurance company. This company usually ranges from 25-95%. After death, the remainder of the benefit is paid out to your beneficiaries. If you should recover from your illness, then you will not have to repay the benefits you received.

How Do You Qualify For An Accelerated Death Benefit?

You qualify for a living benefit if you have contracted a terminal illness and are expected to die in two years, if you have been diagnosed with an illness that will reduce your life span, or you have an illness that requires an organ transplant, you are in long-term care in a hospice. As well as if you need assistance with every day, activities like bathing or using the toilet.

The cost of a living benefit will vary depending on the company. If the coverage is already included, then the cost will be included in the policy. If not, then you will have to pay a fee or a percentage of the death benefit.

How Are You Taxed On Accelerated Death Benefits?

These benefits are not taxable. These benefits are usually tax exempt for individuals who are expected to die within two years. This type of benefit isn’t meant to substitute long term coverage. It is used to supplement any costs that aren’t covered by your insurance company. If you believe you may be eligible for a death benefit, then talk with your insurance agent. Also, keep in mind that receiving a living benefit can affect your eligibility for Medicaid and SSI.

Accelerated Death Benefit Example

Here’s an example of how an accidental benefit rider might play out.

  1. Client induces a qualifying chronic, critical, or terminal illness.
  2. Client files a claim to accelerate all or a portion of the death benefit.
  3. Our claims department and underwriters review the medical records and prognosis ratings and make a discounted offer, based on the change in life expectancy. The higher the change in life expectancy, the higher the percentage the client will be offered.
  4. If the client accepts the offer, they receive the determined amount as a lump sum within two weeks. If the entire death benefit is accelerated, the remaining face is $0 and the policy terminates. If a portion of the death benefit remains, the client’s premium will reflect the new face amount. Below is an example:
Fred is 40 years old, preferred non-tobacco with a $1 million policy. He suffered a major heart attack and decides he wants to accelerate $500,000 of his face. The insurance company reviews the claim and makes a lump sum offer of $265,000. Fred accepts the offer and is mailed a $265,000 check in the next two weeks. His death benefit has now been decreased by the amount of face he accelerated ($500,000), so his remaining death benefit is $500,000. He will now pay premiums based on a $500,000 face amount, not the initial $1 million face.

Regarding the taxes: first and foremost, be aware of the fact that I or the insurance company can act in the capacity of a tax advisor or CPA. We always advise our clients to seek their own tax council. That being said, we have designed our ABRs to be within compliance with current IRS regulations. With regards to the terminal illness rider, the IRS has defined it to be an acceleration of the death benefits, and therefore it is not taxable.

What About Chronic Illness?

For chronic illness, they have proposed but not adopted the rider in the same light. The IRS has not provided any opinion on critical illness payments. With all of that in mind, I am not aware of any accelerated benefit that has been taxed by the IRS. This is, of course, under the assumption that the policy has not be turned into a modified endowment contract (MEC). Once a policy is MEC’d, it is always a MEC, and all benefits are taxable. But again, always involve a tax advisor or CPA when dealing with the IRS. They know the dark side of the force better than any of us.

Accelerated Death Riders and Life Insurance

You never know what’s going to happy. Nobody wants to think about his or her own death, or coming down with a terrible illness, but it’s vital that you plan for the worst. If you don’t give your loved ones the protection that they need, you could leave them with a massive amount of debt and final expenses. That can make an already difficult situation a thousand times worse.

One of the most common reasons that people don’t get life insurance or an accelerated rider is because they assume that it will be too expensive for their budget, but that couldn’t be further from the truth. In most cases, there are dozens of affordable options to give your family life insurance protection, and any additional riders that you need.

The best way to get the lowest insurance rates is to work with an independent insurance agent. Unlike a traditional agent, independent agents don’t only work with one single company. Instead, we represent dozens of highly rated companies across the nation and we can bring all of the lowest premiums directly to you.

Every insurance company is different, and they all have various ways of calculating premiums on their life insurance and riders. If you want to get the best rates, you’ll need to compare dozens of quotes before choosing the one that works best for you. Don’t waste your time calling all of those agents yourself. Let us do all of the work for you.

If you have any questions about life insurance or about any additional riders that you can purchase, please contact us today. We would be happy to answer those questions and ensure that you’re getting the best rates for you and your family. We have years of experience working with applicants to connect them with the protection that their family deserves.

{ 1 comment… read it below or add one }

Kevin Oliveras March 20, 2013 at 12:13 am

I have a sick relative who is essentially a dependent. He have a rare blood disorder called TTP which if untreated has a mortality rate of 90% if untreated and leads to organ failure primarily affecting the kidneys, brain, or heart. With aggressive and extraordinary measures using a treatment called plasmapheresis the survival rate of the disease is 80%-90%. This treatment is only available at major regional medical centers and a single treatment may cost $5000-$7000. The number of treatments may range from seven to one hundred. In rare cases the treatment may not work at all and come with side effects such as seizure, stroke, kidney failure, or gall bladder disease. Treatments require the installation of a permanent catheter usually in the neck which limits and debilitates the patient. Risks from this aspect of treatment and from other medications and procedures carry risks as well. Final costs of a single episode can result in medical bills higher than $250,000 many of which are not covered under any health insurance. Essentially you will die in a two week period of this disease once it is full blown…unless you agree to take extraordinary measures that will put you through torture on a daily basis that will cost you more than you can ever pay.
Can this disease qualify as a terminal illness so that you may qualify for an Accelerated Death Benefit on a life insurance policy? Is there a team of underwriters who’s job it is to disqualify people for this.


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