Life insurance is an incredible investment. It allows you to get the insurance protection needed for your family, especially if an unfortunate event occurred. 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 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.
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.
Overtime, 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 a great help to those who have terminal illnesses.
Many insurance companies offer a living benefit as a rider in some of their life insurance policies. It is commonly included in permanent life insurance policies. So many different packages and payment options are available for living death benefit. 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 every day 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.
- Client induces a qualifying chronic, critical, or terminal illness.
- Client files a claim to accelerate all or a portion of the death benefit.
- 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.
- 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:
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 council. 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 be 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 putt off adding the accelerated rider is 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 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.
I have a sick relative who is essentially a dependent. He have a rare blood disorder called TTP which if untreated has a mortality rate of 90% if untreated and leads to organ failure primarily affecting the kidneys, brain, or heart. With aggressive and extraordinary measures using a treatment called plasmapheresis the survival rate of the disease is 80%-90%. This treatment is only available at major regional medical centers and a single treatment may cost $5000-$7000. The number of treatments may range from seven to one hundred. In rare cases the treatment may not work at all and come with side effects such as seizure, stroke, kidney failure, or gall bladder disease. Treatments require the installation of a permanent catheter usually in the neck which limits and debilitates the patient. Risks from this aspect of treatment and from other medications and procedures carry risks as well. Final costs of a single episode can result in medical bills higher than $250,000 many of which are not covered under any health insurance. Essentially you will die in a two week period of this disease once it is full blown…unless you agree to take extraordinary measures that will put you through torture on a daily basis that will cost you more than you can ever pay.
Can this disease qualify as a terminal illness so that you may qualify for an Accelerated Death Benefit on a life insurance policy? Is there a team of underwriters who’s job it is to disqualify people for this.