While life insurance is intended to provide financial security for your beneficiaries in the event of your untimely death, life insurance policies may also be used for other purposes while you are alive.
An accelerated death benefit rider, also known as the living benefit option, allows a policyholder to receive a cash advance against a policy’s death benefit if he/she is diagnosed with an incapacitating health condition, the onset of a terminal illness, or the need for long-term or hospice care.
Most policyholders who choose to invoke the accelerated death benefit rider have less than a year to live and use the funds for treatments, end-of-life care, and final expenses.
Early Payment of Benefits
An accelerated death benefit generally allows between 25% and 95% of the policy’s face value to be paid out early, and may be collected as either a lump sum payment or increments to provide income and cover medical costs. Afterwards, the death benefit paid to your beneficiaries is reduced by the amount you received early.
If your life insurance company permits 100% of the policy to be accelerated, then no death benefit will be paid to your family after your death. For this reason, it is important to balance the immediate need for cash against your family’s future financial needs before filing a claim.
When Can I Request Early Payment?
The accelerated death benefit may be part of the original policy contract or an optional rider – it depends on your life insurance company. Eligibility for an accelerated death benefit is also determined by your specific policy and provider, but a few examples of medical conditions or situations that qualify you include:
- Chronic or terminal illness resulting in expected death within 12 to 24 months
- Life-threatening medical condition requiring extraordinary and expensive treatment (i.e. organ transplant, AIDS, heart disease)
- A health condition that requires long-term care for basic daily activities such as bathing, eating, housekeeping, etc.
Please note that life insurance should not replace the potential need for long-term care insurance. The purpose of a long-term care policy is to avoid depleting your life insurance benefits, since that is the money you want to leave behind for your dependents.
Submitting A Life Insurance Claim
Before paying out accelerated benefits, life insurance companies require proof of your illness. Some carriers may even stipulate that doctor’s reports must indicate that the person will die of the illness within 12 to 24 months. Additionally, some companies will subtract a small service charge, so be sure to request a quote before formally submitting your accelerated death benefit claim.
Furthermore, if you receive accelerated benefits and your health begins to improve, you do not have to pay back the money to the company if you do not die. Just be mindful that filing a false insurance claim or misrepresenting material information can be considered fraud and subject to criminal or civil legal action.
Federal Income Taxes
As a rule, life insurance death benefits are not taxable. Under the United States federal tax code, the terminally ill do not need to pay taxes on accelerated benefits. A chronically ill person may also qualify for an exemption, but will have to be certified each year to avoid taxes.
However, since an accelerated death benefit could be considered income, tax laws are sometimes unclear and depend on your financial circumstances. Although Medicaid counts the benefits as income, the IRS may not. Please contact an accountant or tax attorney to guarantee compliance with state and federal tax laws.
Medicaid is a state administered, federal insurance plan which covers medical expenses for Americans with financial needs. It can act as a supplement to Medicare for the elderly or pay medical bills when health insurance benefits and savings are exhausted. Filing a life insurance claim for a death benefit may make an individual ineligible for Medicaid since it only covers those without other financial resources. If the accelerated death benefit is claimed and paid out, Medicaid may require the family to refund all or part of the benefits to the state.
Advantages For Seniors
Medicare and Medicare supplement insurance (Medigap) usually limit long term care to no more than 6 months, and few seniors have long term care insurance.
The accelerated death benefit rider may be used by family members to provide in-home nursing or hospice care, or to cover some of the costs of a nursing care facility. Since most seniors have no financial dependents and minimal outstanding loans or liabilities, the accelerated benefit of senior life insurance can help cover the costs of a final illness with minimal financial impact on surviving family members.
Life Insurance Benefits and Policies
A health condition or illness can drain a family emotionally and financially, but accelerated benefits may be able to help with some of the expenses before a medical issue bankrupts a family. Accelerated death benefit life insurance is available on both whole and term life insurance, and offered by more than 200 life insurance companies nationwide.