What is an accelerated death benefit?

This 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 September 27, 2019

KEY TAKEAWAYS

  • When the life insurance company pays the life insurance proceeds before you die, it means you are receiving an accelerated death benefit

  • If you are terminally ill or have a qualifying medical condition, you can access your life insurance benefit early through an accelerated benefit rider

  • Death benefit riders for chronic illness, disability, or long-term care specifically may have different names depending on your provider

  • The accelerated death benefit is usually only a portion of your original death benefit. Beneficiaries receive the remainder after death

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. The accelerated death benefit rider is common and often included in your policy at no extra cost.

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. We’ll discuss how the rider works and how to qualify for and receive the accelerated death benefit.

In this article:

Accelerated death benefit overview

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

How death benefits work

The purpose of life insurance is to ensure that your family and loved ones are covered financially in the event of your death. If you have a life insurance policy, every month your premium payment keeps the plan active (or “in force”), and when you pass away, whoever you selected as the beneficiary will receive the funds. Learn more about beneficiaries.

In most cases, the life insurance company pays out the amount of coverage that you purchased in its entirety. (For example, if you had a $1 million policy, your beneficiaries would receive that much.)

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. While some insurance companies like Brighthouse might allow you to access all of it, most insurers only pay out a portion of the policy’s face value or have a cap. For example, AIG and Lincoln pay 50% of a policy or up to $250,000. The remainder of the life insurance benefit is paid out after you die.

Since you are dipping into benefits allocated for after death, that means the life insurance proceeds will be reduced later on, so remember to adjust your finances accordingly.

Here are some examples of accelerated death benefit amounts (as a percentage of the original life insurance benefit) for different insurance companies. The rider may come with other restrictions or not be available in certain states..

InsurerAccelerated death benefit
AIG50% or up to $250,000
Banner Life/William Penn75% or up to $500,000
Lincoln50% or up to $250,000
Mutual of Omaha80% or up to $1 million
Protective60% or up to $1 million
Prudential90% to 95%
Transamerica75% or up to $500,000

(Other insurance companies that partner with Policygenius offer an accelerated death benefit, but aren’t listed here since the amounts may vary.)

Since you are dipping into benefits allocated for after death, that means the life insurance proceeds will be reduced later on, so remember to adjust your finances accordingly.

Accelerated death benefit 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. Since the accelerated death benefit is paid out before death, it falls under the category of living benefit riders.

Riders come at an added price to the premium, but because the accelerated death benefit rider is quite common (offered by all providers on Policygenius), many insurers include it automatically at no extra cost.

How to qualify for accelerated death benefit

Accelerated death benefits are triggered in specific circumstances — typically when death is imminent. Terminal illness is the most common reason for applying for the accelerated death benefit. 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 a life expectancy of six months or less.

Critical illness

While terminal illness is the most common reason for applying for the accelerated death benefit, some insurance providers may pay out the accelerated death benefit if you have a certain critical illness or medical condition that is survivable, but will leave you with major medical bills and a shortened life expectancy. These qualifying conditions include:

  • Cancer (including invasive and blood cancers)
  • Heart attack
  • Stroke
  • Lou Gehrig’s disease (amyotrophic lateral sclerosis, or ALS)
  • Kidney failure
  • Major organ transplant
  • Coma or paralysis

Chronic illness

Terminal illness is different from chronic illness, which is defined as a condition that prevents you from performing two of the six activities for daily living — eating, bathing, getting dressed, toileting, transferring, and continence. If your insurance company pays out the death benefit early in the even that you become chronically ill, it may be done either as an accelerated death benefit or through a separate accelerated benefit provision called a “chronic illness rider.”

Long-term care

Nursing homes and elder care typically fall under long-term care coverage, which you might get through a living benefits rider or through a separate kind of insurance (a long-term care policy). However, some insurance providers will advance the payment of the death benefit if you have been confined to a nursing home for six months and are expected to remain there permanently. Check your insurance policy or insurance company to confirm if they have such an accelerated benefit rider.

Read more about long-term care insurance.

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What does the accelerated death benefit cover?

You will receive the accelerated death benefit as a lump-sum payment and it can be used however you see fit to 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, like a mortgage or car 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 some circumstances in which you might have to pay taxes.

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. Here are other situations in which the accelerated death benefit may affect your taxes.

Estate tax

When the insured dies, their estate will be responsible for a tax if the total value of the estate — assets and valuables, including the value of the life insurance policy — is over a certain amount. As of 2019, only estates worth over $11.4 million will be subject to the estate tax, but if you’re looking for a way to reduce potential estate tax you can look into an irrevocable life insurance trust (ILIT).

Read more about the estate tax here.

Cash-value life insurance

Some permanent life insurance policies have investment-like components that can increase in value over time. If you withdraw or receive more than what you paid into the policy, then you may have to pay taxes.

Read more about cash-value life insurance.

Group life insurance

If you have group term life insurance offered by your workplace, any amount over $50,000 that you withdraw as an accelerated death benefit is considered taxable income by the IRS.

Read more about taxes and life insurance.

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.