Depending on policy specifics, that could be if you become terminally ill, chronically ill, or critically ill; require long-term care; or experience any of these conditions. (This might be the case if the policy contains multiple riders or if one rider covers multiple events.) Benefits eligibility and limits vary by insurer and by state. One or more ADBs may be included as standard policy features or available as optional riders, some at additional cost, on both permanent and term life insurance policies. ADBs are most typically available on new policies only. They are not considered a form of insurance themselves, but function as an acceleration of the death benefit if exercised.
Alternative names: Living benefits rider, accelerated living benefits rider, chronic illness rider, terminal illness rider, critical illness rider, long-term care (LTC) riderAcronyms: ADB, ABR (accelerated benefit rider)
How an Accelerated Death Benefit Works
Life insurance policies with living benefit riders pay you—as prepayment of the death benefit—while you’re alive if you develop an eligible condition. You may only be able to purchase riders at policy issue, or, less commonly, you may be able to add them at a later date. For example, you might choose to purchase a terminal illness rider that requires a diagnosis of 24 or fewer months to live, as opposed to settling for the standard feature that requires a six-month diagnosis to accelerate the death benefit. When an ADB is exercised—meaning activated—the insurer pays the funds out of the policy’s death benefit, and when the insured dies, the beneficiary receives what’s left. ADBs can pay a percentage of the policy’s death benefit, generally ranging from 25% to 100%, in one lump sum or as an ongoing monthly benefit. For instance, a terminal illness ADB might provide a one-time payment of 75% of the death benefit, while an LTC rider could provide a monthly benefit but limit the total benefit paid to a specific dollar amount. ADBs can also limit the amount of money paid for certain types of care: An LTC rider might pay up to 2% of the death benefit per month for nursing home care, for example, but only 1% per month for home health care.
Tax and Other Considerations
Receiving funds from an ADB can affect your eligibility for Medicaid or other public assistance services. And benefits—though intended to qualify as a “death benefit” under IRS code (and therefore not be taxable)—may or may not have federal and state tax consequences. This depends in part on certain factors, including your life expectancy, the amount of “qualified” expenses you’ve incurred (such as qualified long-term care expenses), and the amount of benefits received. Because federal and state tax laws are subject to change and tax laws related to accelerated benefits are complex, consult a tax advisor before exercising benefits.
What Accelerated Death Benefits Cover
Benefit limits and the circumstances in which you can access the features of an ADB vary. But generally, accelerated death benefits can be divided into four categories with typical triggering events: Although ADBs are common with permanent life insurance policies, like whole life and universal life insurance, some insurers also include them in term life policies or make them available for purchase. Typically, providers offer ADB riders when you purchase a new life insurance policy, but some carriers allow you to add one to existing coverage.
Alternatives to Accelerated Death Benefits
Tapping an accelerated benefit is a good option to have, but it may not always be the best choice, especially if it would trigger tax consequences or affect your eligibility for Medicaid. Plus, the benefit your beneficiaries receive will be reduced or even entirely eliminated. Depending on your financial circumstances, you may want to choose another alternative.
Access the cash value: Permanent life insurance policies, such as whole life insurance and universal life, allow you to borrow or withdraw from your policy’s accumulated cash value. If you take out a loan, you must pay interest, and any unpaid amount will be deducted from the death benefit when you die. Or you could completely surrender the policy for its cash surrender value, in which case the policy would end and no death benefit would be paid. Withdrawing from the cash value or surrendering a permanent life insurance policy may incur fees and tax consequences. Life or viatical settlement: You might be able to sell your policy in a life or viatical settlement. Depending on the type of settlement, you may need to be diagnosed as terminally or chronically ill or be over a certain age, such as 65. Selling the policy ends your coverage, and you may have to pay taxes on the sale, depending on the type of settlement and your qualifying conditions. Long-term care insurance: Long-term care insurance can be expensive but makes sense if you want or need benefits that are not capped by a percentage of your policy’s death benefit. Depending on the terms of the policy, LTC insurance can provide coverage for long-term care expenses for two years up to a lifetime.
