Some life insurance contracts allow the dispensation of benefits before someone dies. That is an accelerated death benefit (ADB) rider. You will also see people refer to it as living benefits. You can use these terms interchangeably.
This is different from the cash accumulation value that builds up in permanent life insurance. You can borrow from the cash value and repay it at your own pace. Usually at a lower interest rate than a personal loan or credit card. The nature of the accelerated death benefit means you don't have to pay it back.
The accelerated death benefit came about in the 80s to cover terminally ill HIV/AIDS patients. With an expected remaining life span of less than a year or two, insurance companies began offering this rider. That way families could pay for the added expenses of their terminally ill loved ones. In later years it expanded to any terminal illness.
Accelerated Death Benefit Definition
The accelerated death benefit allows someone to request a portion of their death benefit in advance of their death. Companies have different rules for expected lifespan, but the industry norm is 1 to 2 years.
So let's say Bob's doctor tells him his liver is failing and he has 18 months to live. He can then choose to use his accelerated death benefit rider to pay for in home care, pay off medical bills, or take his family on the vacation of a lifetime.
The person or family can use the money for anything they want. It doesn't have to be medical bills or legal fees to put the estate in order. Although putting your estate in order and making sure your wishes match what the courts will honor is always a good idea.
Keep in mind the insurance company deducts the amount advanced from the death benefit. So if you have a $250,000 policy and take an accelerated death benefit of $100,000, your beneficiaries will have $150,000 remaining.
Is an Accelerated Death Benefit Taxable?
No. The IRS doesn't want that money. But there are some caveats to that.
An accelerated death benefit is non-taxable if paid out in a lump sum. (See next section for other things you should know about taking a living benefit.)
It becomes taxable if you take it out in installments over time. Then the IRS considers it income. So for tax reasons, taking a lump sum is the best option.
Super Important Consideration About Taking Your Accelerated Death Benefit
Just because the IRS does not consider your living benefit income, does not mean that the government entirely ignores it.
A large sum of money suddenly gracing your bank accounts can affect two important things, Medicaid and Social Security Income.
A massive influx of money will change your financial status which can put your Medicaid at risk. Before you take out your accelerated death benefit, talk to your financial advisor who can specifically detail how it will affect your government benefits.
Accelerated Death Benefits vs. Long Term Care
Depending on your condition, you might need some extra care. Some people pay for that extra help with their accelerated death benefit cash.
Long Term Care can be either a stand alone policy or a life insurance rider that provides money income for someone who needs a little extra help.
The requirements for a long term care rider to kick in when the insured person cannot perform two activities of daily living. Activities of daily living are the following:
- Transferring (walking or moving around)
Long term care came about to take care of people when they can no longer live on their own. Most policies plan to spend all the available monthly benefit after three years.
The primary difference is in the payout and the pricing of the two options. Long term care insurance is expensive. There is no way around that unless you bought your policy 10 or 20 years ago when insurance companies were first offering it. But pricing has steadily risen since that time.
Is an Accelerated Death Benefit a Good Idea to Have on a Policy?
If it's free, having it is not a bad idea. You don't have to use it.
It's not a bad idea as far as optional life insurance riders go, especially if you have a family history of tragic illnesses. It's an additional hedge against outrageous medical bills that would fall to your estate.
What to Look for in an Accelerated Death Benefit Rider
There is quite the range of options available for ADB or living benefits. Some companies limit you to withdrawing 25% percent of your benefit with a 1-year remaining life expectancy. We've even heard of companies reducing your death benefit by the amount you request to withdraw, not the amount they actually give you.
On the other end of the spectrum, some companies will offer an accelerated death benefit up to 95% of your face amount. The more generous companies will also allow you to withdraw funds with a 2-year remaining life expectancy.
How to Use Your Accelerated Death Benefit Rider
If you have this on your policy, be aware it doesn't work like an ATM where it immediately spits out money at you. Like anything involving insurance, there is a process.
First, you need to have the diagnosis of terminal illness. The expected life span, according to the doctor, must be within the allotted range of the living benefit rider.
The next recommended step is recommended, but not strictly necessary. Make sure that a lump sum payment from your insurance company will not negatively impact your Medicaid or any Social Security. If that means talking with a financial advisor, it would be a wise decision.
Then you will need to apply to your life insurance company with the amount you want to withdraw.
Your life insurance company will review your application to take advantage of your accelerated death benefit. They will examine the medical info you send them and possibly request more. This process can take a couple of weeks.
Finally, they will send you back an offer (much like they did with your original life insurance application.) It may be for the amount you requested, or it may be a lesser amount.
When you accept the offer, your death benefit (face amount) will be reduced by the amount you received. Your premiums will also be adjusted accordingly.
How Abrams Insurance Can Help
We are independent agents which means that we work for you and not the life insurance company. If a strong accelerated death benefit rider for your policy is something that interests you, give us a call today at 858-703-6178. We are happy to answer any questions. Plus there is never an obligation to buy.