Accelerated death benefits are life insurance policy riders or provisions that can be added to your insurance and allows you to access death benefits while you’re still alive. The accelerated death benefit is common and can often be included in your policy at no additional cost.
Sometimes known as a “terminal illness benefit,” individuals who choose accelerated death benefits usually are faced with a terminal illness, have less than one year to live, and use the money for treatments and other cost of living expenses. However, one thing to keep in mind is that receiving death benefit payments early will lower the amount of money your beneficiaries will receive after you pass. In this blog post, we’ll go over how accelerated death benefits work, some tax considerations, and how you can qualify to receive them.
How do Accelerated Death Benefits Work?
Accelerated death benefit provisions were started in the late 1980s to help alleviate the pressures of those diagnosed with AIDS. Through accelerated death benefits, policyholders can pay for their daily living and medical expenses as well as look after the needs of their family once they pass.
Life insurance policies make sure that your family is taken care of financially in the event of your death. As with any insurance policy, the policyholder makes premium payments every month to keep the place in force or active. When you pass away, your life insurance company pays the amount of coverage you purchased in its entirety to your beneficiaries.
Accelerated death benefits allow you to access this money before you pass away and your beneficiaries will only receive a portion of this money after your death. This benefit is attached to your life insurance policy via a rider or an optional provision to your policy that may not be purchased alone. Policy riders can include an added price to your premium but since this is a common rider, many insurance companies include it automatically at no extra cost.
Most insurance companies only allow you to access a portion of your policy’s face value or implement a cap. The remainder of the life insurance benefits are paid out after death.
Here is a table of different insurance companies and how much of accelerated death benefits they allow to be accessed. Keep in mind that other restrictions exist or may not be available in certain states.
|Insure||Accelerated Death Benefit|
|AIG||50% or up to $250,00|
|Transamerica||75% or up to $500,000|
|Banner Life/William Penn||75% or up to $500,000|
|Prudential||90% to 95%|
|Lincoln||50% or up to $250,000|
|Protective||60% or up to $1 million|
|Mutual of Omaha||80% or up to $1million|
Additionally, seniors with terminal illnesses may look at viatical settlements as another option. Through viatical settlements, your life insurance policy is sold to a third party and you receive a lump sum. The difference between viatical settlements and accelerated death benefits is that with accelerated death benefits, the policyholder must continue to make monthly premium payments. With viatical settlements, the third party who purchase the policy is responsible for monthly payments. This could be a great alternative for many seniors. If you are more interested in the viatical settlement option, talk with any of our experienced staff to get you started.
Tax Considerations for Accelerated Death Benefits
An important thing to note is that accelerated death benefits are not subject to federal income taxes. Additionally, death benefits are usually paid out in one lump sum but if you choose to receive benefits in installments, these payouts may accrue interest which can be subject to taxes. The following are a few more ways in which your death benefits may affect your taxes:
- Group Life Insurance
If you have group term life insurance (if this is offered by your employer, for example), any amount over $50,000 withdrawn as accelerated death benefits will be considered taxable income by the IRS.
- Estate Tax
When an insured passes away, if their assets will be levied an estate tax if it is over a certain amount. In 2020, estates worth over $11.58 million will be taxed. The value of your life insurance policy is included in your assets so be aware of that when calculating finances.
- Cash-Value Life Insurance
Keep in mind that some permanent life insurance policies have investments that can increase over time. If you withdraw more money than you pay into your policy, then you might be subject to taxes.
How do you Qualify for Accelerated Death Benefits?
Terminal illness with a low life expectancy is the most common reason for acquiring accelerated death benefits. To figure out if you qualify for accelerated death benefits, your life insurance company will require certification from your doctor pronouncing you terminally ill and stating that you have a life expectancy of between 12 to 24 months. Keep in mind that some providers require a life expectancy of six months or less. Contact your life insurance provider to find out the specifics of what their life expectancy requirements are when applying for accelerated death benefits.
Terminal illnesses are the most common reason for applying for accelerated death benefits. However, many insurance providers may approve accelerated death benefit payout if you have qualifying conditions such as survivable critical illnesses or medical conditions that will leave you with unmanageable medical bills and a shortened life expectancy. Some of these qualifying conditions are:
- Coma, paralysis
- Cancer (invasive and blood cancers)
- Major organ transplant
- Heart attack
- Kidney failure
- Lou Gehrig’s disease (ALS)
There are other cases aside from terminal illness where your insurance provider will pay out your accelerated death benefits: chronic illnesses and long-term care.
By definition, chronic illnesses are conditions that prevents the performance of two of the six activities for daily living – eating, bathing, toileting, independent movement, dressing, and continence. Accelerated death benefits can be paid out due to chronic illness or through a “chronic illness rider.”
If you are approved for nursing homes or elder care, insurance providers may advance the payment of death benefits if you will be confined to a nursing home for six months and will remain there permanently.
If you or your loved one needs assistance on ways to afford any future expenses due to a terminal or chronic illness, Harbor Life Settlements may be able to help. Get in touch with one of our professionals today to see if you may be eligible to sell your life insurance for a lump cash sum through a life or viatical settlement and receive a FREE cash estimate on the value of your policy.