We all know that having a life insurance policy is a crucial step to take to protect your loved ones when you pass away. But did you know insurance companies offer additional “living benefits” for you as a policy owner?
These benefits provide money that is ready to use while you are still alive. Unfortunately, most people don’t even realize they have the right to use their money early. This right typically comes in the form of a living benefit rider. If you are eligible, you may even access your death benefit early.
Accelerated Death Benefits
Accelerated death benefit rider is a term you’ll encounter once you get into the life insurance buying process. On the other hand, accelerated death benefits are a relatively new option, so if you have owned your policy for a long time, it may not have been mentioned to you at the time of purchasing your policy.
Most insurers automatically offer accelerated death benefit riders with their policies, but not all do. It is only responsible for determining beforehand whether the policy you’re considering or the one you already purchased provides an accelerated death benefit.
This article will break down all the pros and cons of this offering and help explain how it works in case you need to use it. We will cover:
- Definition of life insurance accelerated death benefit
- How does the accelerated death benefit rider work?
- Eligibility requirements for the accelerated death benefit
- How are accelerated benefits paid?
- Does the accelerated benefit rider cost extra?
- Tax implications of this life insurance policy feature
- Pros and cons of having life insurance with the accelerated death benefit
- Alternatives to accelerated death benefits
- Achieve financial freedom with the Infinite Banking concept
Definition of Life Insurance Accelerated Death Benefit
An accelerated death benefit (ADB), known as accelerated death benefit rider or terminal illness rider, is a supplemental insurance product that allows a life insurance policy owner to receive cash advances against their death benefit.
The accelerated death benefit rider permits you to access a portion of the life insurance policy funds before your death, making this a “living benefit” feature.
It’s primarily designed to help cover the cost of long-term care and medical bills, but you have the freedom to spend that money on anything you wish.
Usually, an accelerated death benefit is allowed only under particular circumstances, such as being diagnosed with a terminal illness with a short life expectancy of two years or less. If this is the case, you will be asked to provide medical proof.
However, some life insurance companies let you apply for the accelerated death benefit rider in these situations:
Critical Illness or a Chronic Illness
If you’re diagnosed by a medical professional with a critical illness or a chronic illness that can shorten your life expectancy, you may apply for accelerated benefits. These illnesses typically include different types of cancer, stroke, heart disease, heart attack, kidney failure, coma, paralysis, or ALS amyotrophic lateral sclerosis, et al.
Catastrophic Illness That Requires Special Treatment
In case you’re diagnosed with a catastrophic illness that requires special treatment, and you need hospice long-term care, continuous life support, or an organ transplant, you may as well apply for the accelerated benefits rider.
Your Health Condition Requires Assistance for “Activities of Daily Living”
Your insurance company may allow applying for the accelerated benefit rider if you can no longer do two or more daily living activities on your own and need long-term care. Typically, this includes bathing, getting dressed, eating, going to the bathroom, controlling your bladder or bowels, changing positions, etc.
You’re Permanently Living in a Nursing Home
Depending on your life insurance provider, you might be able to access your policy’s payout if you have been in a nursing home for at least six months and are expected to remain there.
Tip: if you want to ensure receiving a portion of the death benefit from the insurance company, please make sure you’re making regular monthly payments.
How Does the Accelerated Death Benefit Rider Work?
Although this type of living benefit is called an accelerated death benefit, it’s not literally about getting a payout for you. Instead, it allows you to access a portion of your death benefit proceeds and get your affairs in order.
Having an option to dip into your insurance proceeds ahead of time is a big deal, as it can help you make arrangements and settle affairs so that your family doesn’t have to. Being able to pay for your medical expenses and other financial needs before passing away from a terminal illness would make it easier on your mourning family members.
However, the exact amount of benefit you receive depends on your life insurance provider’s specific accelerated death benefits offer. Most insurance companies differ on how much cash can be accessed and how close to death the insured person must be when applying to receive these benefits.
According to the National Association of Insurance Commissioners, these numbers will vary; your insurance company can offer anywhere from 25 to 95 percent of the policy’s death benefit.
For example, Haven term policyholders can roughly receive about 75 percent of their death benefit or up to $250,000. If you opt for this rider, your monthly (or yearly) premium payment will decrease to reflect the new face value.
There’s one critical point to keep in mind when accelerated death benefits come to play. Remember that if you decide to use a certain amount of your policy’s death benefit, the amount your beneficiaries receive will be lowered by that amount of money you received.
That’s not inherently a bad thing, as living benefits offer a measure of comfort and convenience in the midst of dealing with a terminal illness. Like everything else in life, a dose of comfort comes with a price, and in this case, it’s impacting your life insurance coverage.
When considering everything, the price seems quite reasonable. If you have further uncertainties about your specific situation, please check with your insurance agent, as they can be a great resource of information.
Eligibility Requirements for the Accelerated Death Benefit
The terminal illness benefit rider has several qualifying factors that vary between the policy issuers (the life insurance company) and the policy itself.
Personal Eligibility Requirements
If you wonder whether your age may impact your eligibility, do not worry, as it usually isn’t an issue. The primary personal eligibility factor is your life expectancy.
As previously mentioned, most policy owners usually must have life expectancies of less than two years to receive this benefit. You may also be eligible if you have a specific chronic illness that requires expensive medical treatment or long-term care.
Once you decipher whether you fit into personal eligibility factors, policy requirements are next to consider. Nowadays, most life insurance policies offer the accelerated benefit, so your insurance policy type is usually not a restricting factor.
However, the policy’s face value is the critical factor determining whether you will receive accelerated death benefits. Generally, life insurance policies with face values lower than $25,000 are not eligible for receiving the accelerated benefit rider.
How Are Accelerated Benefits Paid?
There are no standard rules with accelerated benefit payments. However, there are two predominant forms:
- lump-sum payments
- monthly installments
In simple words, receiving your accelerated benefit as a lump sum payment means receiving the total accelerated benefit payment amount at once. Generally, lump-sum payment is a more common payout method for individuals diagnosed with a terminal illness.
On the other hand, chronic illness payouts are usually received in installments (monthly or annual) throughout a preset period.
For example, suppose you want to receive your death benefit early due to chronic illness; your life insurance company might offer you a maximum of 25% of your death benefit per year for up to four years.
Be aware that some insurers do not fall into this category and use their own formula to work out the amount of accelerated benefits rather than paying a specified percentage of your death benefit.
These formulas are usually based on your life expectancy at the time of your application for accelerated benefit. In other words, it may be hard to pinpoint the specific amount you’ll receive until the moment you need it.
Keep in mind that some insurers may charge you with an administrative fee or service charge once you decide to access an accelerated benefit.
Does the Accelerated Benefit Rider Cost Extra?
The best thing about the accelerated death benefit rider is that it usually comes at no extra cost. In this case, this feature comes included in your insurance policy, so you typically don’t need to pay a higher monthly premium. Feel free to ask your provider whether adding the rider will raise your insurance premiums!
Tax Implications of This Life Insurance Policy Feature
Taxation may become a potential issue when receiving a portion of your death benefit. The Internal Revenue Service clarifies the tax status of this insurance rider. Known as the Long-Term Care and Accelerated Death Benefits form, this IRS form allows an individual taxpayer to report their long-term care benefits (LTC), including accelerated death benefits.
The moment you receive your accelerated benefit payment, a Form 1099-LTC will be generated too. Providers of his form are typically your insurance company, governmental units, or viatical settlement provider.
On the bright side, these benefit payments are usually income tax-free because death benefits are tax-free in general.
Whether you will have to pay taxes depends on several factors, such as:
- your life expectancy
- the amount of “qualified” expenses you’ve collected (qualified long-term care expenses)
- the amount of the received benefits
As federal and state tax laws are subject to change, it’s always wise to discuss with your tax advisor before exercising these benefits. The last thing any terminally ill individual wants to deal with is an unexpected tax bill.
Another potential downside to receiving a living benefit in case of chronic or serious illness is that it can affect your ability to receive Social Security or Medicaid disability payments, as you may need those. Please check with your Medicaid caseworker to determine whether this would refer to your particular case.
Pros and Cons of Having Life Insurance With the Accelerated Death Benefit
- access to your policy’s death benefit can help ease the financial stress for you and your family
- you can use this money to cover medical bills and other expenses
- you’re allowed to spend this money wherever you want to
- generally, this money is tax-free
- it provides flexibility with no additional costs
- your beneficiaries will receive a reduced death benefit when you pass away
- the amount of accelerated benefit you can receive is limited
- accepting this benefit may affect your eligibility for Medicaid or Social security
- you have to be chronically or terminally ill to receive these benefits
Alternatives to Accelerated Death Benefits
Permanent life insurance policies allow you to borrow or withdraw from your policy’s cash value account. You can also take out a loan against your policy or surrender the policy and receive its cash surrender value. Usually, this is all tax-free money.
Another alternative option is to sell your policy in life or viatical settlement. However, some settlements also require that you’re diagnosed as terminally or chronically ill. They may come with a requirement to be over a certain age, such as 65.
Once you sell the policy, it ends your coverage, and you may have taxes to pay depending on qualifying conditions and your type of settlement.
Long-Term Care Insurance
Long-term care is best for those who want or need benefits not limited by a percentage of your policy’s death benefit. Keep in mind this option is relatively expensive, but it also provides long-term continuous coverage for care expenses for two years and more.
Achieve Financial Freedom With the Infinite Banking Concept
Accelerated Death benefit rider is just one way of utilizing your life insurance policy’s living benefits, but it’s not the only one. What if we told you that with Infinite Banking, you could make even better use of the money deposited in your cash value savings account?
With Infinite Banking, you can build your wealth while borrowing and repaying the money held in your permanent life insurance policy’s cash value. When doing so, you imitate how a traditional bank operates but without depending on a third party anymore. Thus, you become your own bank!
How Does Infinite Banking Work?
The Infinite Banking Concept is a strategic method that allows you to take advantage of your Whole Life Insurance policy and finance everything you typically finance through a bank.
Instead of borrowing from a bank, you borrow money against yourself and single-handedly dictate the money flow. Thus, you become both a creditor and a lender. Meanwhile, your Whole life insurance policy is still earning dividends, even though you are using that money elsewhere.
The main benefit of using this borrowing setup strategy is that you would never have to borrow money from a bank again. Forget about dealing with hefty banking fees or interest rates on loans; instead, borrow from your insurance policy and pay yourself back over time.
Key Steps to Building Your Own Bank
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life policy from a life insurance company.
- Accumulation of Cash Value (tax-free) throughout the years you are a policyholder of your Whole Life policy.
- Tax-Free Loans against your Whole Life Insurance policy’s cash value to use for your financial expenses.
Make sure to follow these three steps to implement the Infinite Banking strategy and secure your family’s financial future. This unique money-building strategy allows you to safely engage in multigenerational wealth-building without complicated money-earning schemes.
In most cases, having a living benefit rider in place is of great value for terminally ill individuals. It can provide a relatively quick money source, as the benefits can be paid out in as few as four to six weeks!
Thanks to this benefit, you can pay expenses not covered by health insurance and much more. However, keep in mind that this is just one way to access the benefits of your life insurance policy.