What is an accelerated death benefit?

The accelerated death benefit is a life insurance policy rider that lets you access your death benefits when you’re still alive, usually to cover the cost of care when you have a terminal illness.

Elissa

Elissa Suh

Published March 26, 2019

The accelerated death benefit is a life insurance policy rider that lets you access your death benefits when you’re still alive, usually to cover the cost of care when you have a terminal illness.

For this reason, the accelerated death benefit is sometimes also known as the terminal illness benefit. To qualify, specific conditions, such as having a critical illness or shortened life expectancy, must be met for the rider to kick in, and in most cases only a portion of the death benefit funds will be paid out to the policy owner.

This money can be used toward medical expenses and assisting with any financial burden on family and loved ones during the final years. Receiving the death benefit payment early will reduce the amount your beneficiaries can collect after you die.

Read on:

How does the accelerated death benefit work?

Put most simply, the accelerated death benefit is what happens when the life insurance death benefit is paid out early, while the policy owner is still alive. It is made possible through a rider—an add-on to your insurance policy that may increase the premium.

Life insurance death benefit

The purpose of life insurance is to ensure that your family and loved ones have financial coverage in the event of your death. If you have a life insurance policy, every month you pay a premium to keep your plan active (or “in force”), and when you pass away, whoever you selected as the beneficiary will receive the funds.

In most cases, the life insurance company pays out the amount of coverage that you purchased in its entirety.

However, if you access this money before you die, as an accelerated death benefit, you and your beneficiaries would only receive a portion of the funds. Some providers, like Brighthouse, allow you to access all of it, but most insurance companies pay out 50% to 75% of the policy’s face value or have a cap. For example, Mutual of Omaha will pay out 80% of your policy or $1 million, whichever is less, while AIG will pay 50% with a cap of $250,000. The remainder of the benefit is paid out after you die.

Since you are dipping into benefits allocated for after death, remember that means there will be less available later on, so adjust your finances and plan accordingly.

Insurance rider

The accelerated death benefit is enacted by a rider, an optional provision to your insurance policy that cannot be purchased alone.

After you’ve chosen a life insurance plan, you may decide you want additional coverage that was not offered in the policy’s original terms. Adding a rider lets you enhance or customize your plan to fit your needs, usually by making a change to your benefit structure (for example, receiving returned-premium funds). Since the accelerated death benefit is paid out before death, it falls under the category of living benefit rider.

Riders come at an added price to the premium, but because the accelerated death benefit rider is quite common (offered by all carriers on Policygenius), many providers include it automatically at a built-in cost.

How do I qualify for accelerated death benefit?

Accelerated death benefits are triggered in specific circumstances when death is imminent. To qualify, the insurance company will require certification from a doctor or medical professional deeming you terminally ill and stating that you have a life expectancy of 12 to 24 months, though some providers may require six months or less.

While terminal illness is the most common reason for applying for the accelerated death benefit, critical illnesses may qualify under certain insurance providers.

These qualifying conditions include:

  • Cancer
  • Heart attack
  • Stroke
  • ALS
  • Kidney failure
  • Major organ transplant

Chronic illness

Keep in mind that terminal illness and critical illness differ from chronic illness, which is defined as a condition that prevents you from performing two of the six activities for daily living. If your insurance company offers this, it will be through a separate rider for this accelerated benefit.

Long-term care

Nursing homes and elder care typically fall under long-term care coverage, whether by a living benefits rider or as a separate insurance entirely. However, some insurance providers like Prudential and Protective will advance the death benefit payment if you have been confined to a nursing home for six months and are expected to remain there permanently.

Read more about long-term care insurance.

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What does the accelerated death benefit cover?

The money paid out from the accelerated death benefit is unrestricted and can be used however you see fit to best care for yourself and spend time with your family. Beside medical expenses, you can use the money for:

  • Hospice
  • Nursing home
  • Private caretaker
  • Vacation
  • Paying off debt, such as a mortgage or auto loan

Do I have to pay tax on accelerated death benefits?

Life insurance payouts like the accelerated death benefit are not subject to federal income tax, but there are a few circumstances that might have tax implications.

Death benefits are usually paid out as one untaxed lump sum but, if you choose to be paid in installments, the incremental payouts may accrue interest, which can be taxed.

The accelerated death benefit will not be taxed at the point of payout, but might incur tax when it becomes part of the insured’s estate. This would happen if the insured has no beneficiaries and already possesses the accelerated death benefits as cash in their bank account, causing his or her assets to go over the estate tax exemption. As of 2019, the estate tax exemption is $11.4 million and any amount over that will be subject to taxation.

Cash-value life insurance

In the event that you have a permanent life insurance policy that gained value due to its cash-value component, the accelerated death benefit will remain untaxed.

Group life insurance

If you have group insurance offered by your workplace, then anything over $50,000 will be considered taxable income, including accelerated death benefits

Read more about taxes on death benefits.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.