Life insurance is an incredible investment. It allows you to get the insurance protection needed for your family, especially if an unfortunate event occurs. But what if you end up with a chronic condition that drains your bank account?
For anyone with a terminal illness, an accelerated death benefit can be a savior.
An accelerated death benefit is an insurance benefit that pays out while the insured is still alive.
Usually, only people who are suffering from terminal illnesses are eligible for accelerated death benefits.
This is also called a living benefit.
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What Is a Living Benefit?
A living benefit can be added to an insurance policy before or after purchase. With this benefit, patients who have a terminal illness can access part of their benefits before their death. Initially, when this benefit was first created, it was offered only to people with HIV/AIDS.
Over time, it was offered to people who suffered from kidney failure, cancer, and other terminal illnesses. Medical expenses for a terminal illness can be very expensive, and there are also living expenses that the terminally ill have to pay as well. A living benefit can aid with all of these expenses and can be of great help to those who have terminal illnesses.
So many different packages and payment options are available for living death benefits. You can receive the death benefit if you already have a terminal disease or if you contract one in the future.
Not everyone wants to think of the possibility of contracting a terminal disease, but for some, a living benefit may be something they wish to add to their policy. You will receive a percentage of the death benefits depending on the insurance company. This company usually ranges from 25-95%.
After death, the remainder of the benefit is paid out to your beneficiaries. If you should recover from your illness, then you will not have to repay the benefits you received.
How Do You Qualify for an Accelerated Death Benefit?
You qualify for a living benefit if you have contracted a terminal illness and are expected to die in two years, if you have been diagnosed with an illness that will reduce your life span, if you have an illness that requires an organ transplant if you are in long-term care in a hospice, or if you need assistance with everyday activities, like bathing or using the toilet.
The cost of a living benefit will vary depending on the company. Sometimes, your policy might have the rider grouped in with your premium, which would be ideal. Otherwise, you will owe a percentage of the benefit.
How Are You Taxed on Accelerated Death Benefits?
These benefits are not taxable. Normally, if you were to pass within 2 years, it would be exempt. Use the rider to supplement any costs that aren’t covered by your insurance company.
If you believe you may be eligible for a death benefit, then talk with your insurance agent. Also, keep in mind that receiving a living benefit might change your chances of Medicaid or SSI in the future.
Accelerated Death Benefit Example
Here’s an example of how an accidental benefit rider might play out.
1. The client induces a qualifying chronic, critical, or terminal illness.
2. The client files a claim to accelerate all or a portion of the death benefit.
3. Our claims department and underwriters review the medical records and prognosis ratings and make a discounted offer based on the change in life expectancy. The higher the change in life expectancy, the higher the percentage the client will be offered.
4. If the client accepts the offer, they receive the determined amount as a lump sum within two weeks. If the entire death benefit is accelerated, the remaining face is $0, and the policy terminates. If a portion of the death benefit remains, the client’s premium will reflect the new face amount. Below is an example.
Bill is 47 years old, preferred NT with a $2 million policy. He suffered a major heart attack and decides he wants to accelerate $1,000,000 of his face. The company reviews the claim and makes a lump offer of $500,000. Bob accepts and is mailed a $500,000 check in the next two weeks. His death benefit has now been decreased by the amount of face he accelerated ($1,000,000), so his remaining death benefit is $1,000,000. He will now pay premiums based on a $1,000,000 face amount, not the initial $2 million face.
Regarding the taxes: first and foremost, be aware of the fact that I or the insurance company can act in the capacity of a tax advisor or CPA. We always advise our clients to seek their own tax counsel. That being said, we have designed our ABRs to be within compliance with current IRS regulations.
With regards to the terminal illness rider, the IRS has defined it to be an acceleration of the death benefits, and therefore, it is not taxable.
What About Chronic Illness?
For chronic illness, they have proposed but not adopted the rider in the same light. The IRS has not provided any opinion on critical illness payments. With all of that in mind, I am not aware of any accelerated benefit that has been taxed by the IRS.
This is, of course, under the assumption that the policy has not been turned into a modified endowment contract (MEC). Once a policy is MEC’d, it is always a MEC, and all benefits are taxable.
But again, always involve a tax advisor or CPA when dealing with the IRS. They know the dark side of the force better than any of us.
Accelerated Death Riders and Life Insurance
Starting to look at the options associated with your life insurance policy can bring about tough conversations. It’s hard to talk about your death or the demise of someone close to you.
But it is important because someone could be left with large debt and final expenses. Having to worry about those payments adds to a stressful situation.
It is common for people to put off adding the accelerated rider because they assume that it will be too expensive for their budget, but that is just false. In most cases, there are dozens of affordable options to give your family life insurance protection and any additional riders that you need.
There are various ways of calculating premiums on their life insurance and riders, and no company has the same value on these factors. To get the best rates, you’ll need to ask for many quotes until you find a perfect plan for your needs.
Don’t waste your time calling all of those agents yourself. Let us do the searching for you.
As independent agents, we offer the best way to get the lowest insurance rates. Our appointments are with multiple carriers, so we have expanded options, which makes it easier to give you the best quote for your coverage.
Our years working in the industry have given us the knowledge to answer any question you can think of. And if we don’t know it, we will find the answer for you. Our main goal is to give your family the protection they deserve.
The Bottom Line – How Does An Accelerated Death Benefit Work?
Life insurance, more than just a protection measure for unforeseen events, offers a unique advantage through the accelerated death benefit or living benefit.
For those diagnosed with terminal illnesses, this benefit can provide financial relief during life’s most challenging times. It allows individuals to tap into a portion of their policy’s death benefit while they’re still alive, helping to cover pressing medical and living expenses.
Each insurance company has different provisions, ranging from the percentage of the benefit accessible to the conditions under which one qualifies. It’s crucial to understand the potential tax implications and eligibility criteria, ensuring that beneficiaries have the much-needed financial safety net.
Always engage with an experienced agent or financial advisor for the most suitable insurance solution.