So you have a life insurance policy. Good job! You’re being responsible with your finances. In the event of your death, your loved ones will have money to pay for things like your funeral, a mortgage, or college expenses.
But what if you need that money before you die?
Under certain circumstances, you can receive life insurance death benefits early through an accelerated death benefit rider to get access to money early so your family doesn’t have to struggle through your final years.
What is a rider?
An accelerated death benefit can be added to a life insurance policy as a rider, so it’s important to know just what that means.
Riders are add-ons to your life insurance policy. You pay a little more for some added benefits on top of the normal life insurance protections. These could be extras such as waiving premiums if you’re disabled for a certain period of time, converting a term policy to a permanent policy, returning paid premiums if you outlive your policy’s term, or, as we’ll talk about here, receiving death benefits early.
Riders aren’t typically worth the extra cost on top of the policy premiums, but they do allow you to customize your policy if you have special circumstances that you think you’ll need additional protection for.
How an accelerated death benefit rider works
An accelerated death benefit rider lets you use money normally allocated for a death benefit (the amount a life insurance policy pays out) before you die. It’s also known as a type of living benefit rider because, as opposed to a death benefit – which gets paid out upon your death – the benefit is paid while you’re still living.
It seems strange, doesn’t it? If a life insurance policy is supposed to go into effect after you die, it doesn’t make sense that you can access that money beforehand – everyone would be trying to get early cash. There has to be a catch, right?
There is. You can’t pull out money whenever you want even with an accelerated death benefit. There are very specific conditions that have to be met before this rider will kick in.
In order to qualify for an accelerated benefit, you usually must be deemed terminally ill. The rider will note the life expectancy that makes you eligible for an accelerated benefit; it’s usually 12 months or less but could be up to 24 months.
Other circumstances under which you might qualify for an accelerated benefit are acute illnesses that are typically fatal without treatment but may not necessarily fall within the 12-24 month timeline; catastrophic illnesses that require procedures like organ transplants; or if you’re unable to perform basic daily activities.
An accelerated death benefit pays out a percentage of your total death benefit. The total will depend on your individual insurer and policy; it’s 50% with Nationwide, for example, but can be as high as 80% of the total death benefit with other carriers.
Recipients of accelerated death benefits usually use the early payout to pay for illness-related bills, but they can also use it to get financial tasks in order before their death; they might, for instance, work out the details of paying off their house or other debts so that it’s finished before they die and it isn’t left to their significant other. Some people even use it to take a vacation and spend their remaining time with loved ones.
This all seems great – getting life insurance money early to pay for medical care can be a huge relief for families – but there are some drawbacks to consider before you decide to exercise an accelerated death benefit rider.
First, as mentioned, the eligible circumstances for accelerated benefits are pretty narrow. That in itself isn’t a bad thing since it will keep people from taking advantage of an early payout, but it’s important to know before you bank on getting that money. Your insurance company will require physician’s statements and medical records attesting to your illness before they’ll pay out any early benefits.
There are also potential tax implications to an early payout. There may be limits on the amount of the death benefit that’s exempt from income tax, so it’s possible you’ll owe money to the IRS depending on how much you receive.
Finally, getting a portion of your death benefit early means there’s less to be collected after your death. The accelerated benefit isn’t added on top of your normal death benefit but rather is deducted from it. Again, on its own that’s not necessarily a bad thing, but if your family is expecting to receive a certain amount of money but will actually be getting a certain amount of money minus the amount that was already paid out and spent on medical bills, they’ll have to adjust accordingly.
Accelerated death benefit riders are available for most life insurance policies; in fact, your policy may have such a rider and you might not have even known about it. Whether you already have a life insurance policy or are doing research into getting one, you should check with a broker if an accelerated death benefit rider is something you’re interested in.
Image: David Muir