For most people, their primary reason for purchasing life insurance is to provide funds to their surviving loved ones to reduce the financial stress that the loss of your income is likely to cause. Some people purchase life insurance for more specific purposes like paying off a mortgage (mortgage protection insurance), final expense insurance (paying for a funeral and other final expenses), and business continuation purposes like funding a buy-sell agreement or key person insurance.
In all of these cases, it is the ultimate death benefit that was the purpose of the insurance. You can, however, get living benefits from your life insurance other than the cash value that is a component of permanent life insurance. In fact, you can get living benefits included with a term life policy as well.
Accelerated Death Benefit – What is It?
The Accelerated Death Benefit (ADB) provides for the life insurance company to advance a portion of the death benefit to the policyholder and not the beneficiary. Each insurance company that offers this benefit sets specific guidelines on when it will be paid and how much will be paid, but most pay this benefit if the insured is diagnosed with a terminal illness that will likely result in death within one or two years.
There are, however, different situations when an accelerated death benefit rider (or a form of it) will be offered by the insurance company, but is always dependent on which company you purchase your life insurance policy from.
Terminal Illness Diagnosis
The terminal illness diagnosis was likely the original reason for the accelerated benefit rider. Life insurance companies started offering this rider (or adding it at no charge) for policyholders who were diagnosed with a terminal illness that would likely result in death within two years.
Its purpose was to provide a portion of the death benefit to the insured so they might comfortably cope with the costs of dying. It is suspected that the rider and its entrance into the marketplace may have been due to the many Americans infected with the AIDS virus. Over the last decade, life insurers have been offering the accelerated death benefit for even more reasons to help comfort their policyholders and the families of those policyholders. Some of the health issues that can trigger this rider are:
- Significant reduction in lifespan due to a critical illness
- Organ transplant as a result of a critical illness
- Hospice care
- Long-term care facility
- Assistance with daily living activities
How Does it Work?
If your life insurance policy contains the ADB provision, upon receiving proof of your claim, the insurance company will advance a portion of the policy death benefit to the named insured in a lump-sum payment. How much the insured receives depends on the terms and conditions of the insurance contract and the face amount (death benefit) of the policy.
For example, Fred Wilson has a 30 –year term insurance policy that includes the ADB benefit with a policy face amount of $500,000. Fred is diagnosed with pancreatic cancer and is given a prognosis of 18 months.
After sending the required documents to the claims department, the insurance company offers Fred 50% of the death benefit and Fred accepts the offer. Fred receives a claim check in the amount of $250,000 with no taxes deducted.
It’s important to note that once the insured receives their ADB claim check, he or she can use it for any purpose they choose. The money is meant to make their passing more bearable and to financially help surviving loved ones, but if the insured chooses to go to Hawaii or pay off gambling debts, it’s their business.
What about Taxes on the Money?
In most cases, the payout from the accelerated death benefit is non-taxable to the recipient just as the death benefit is non-taxable for the beneficiary. There are, however, certain situations where the recipient may have a tax liability and for that reason, it’s important to discuss your situation with a tax accountant.
Also, it’s important to note that receiving a large lump-sum payment could possibly affect your Medicaid or Supplemental Social Security benefits.
What Happens to the Death Benefit?
Any time an ADB is paid out on a policy, the amount of the death benefit is reduced by the amount of the ADB claim.
For example, in Fred Wilson’s case that was mentioned above, when Fred passes away, his beneficiary will receive $250,000 instead of the original death benefit of $500,000.
The Accidental Death Benefit should not be confused with borrowing cash value from a whole life or universal life insurance policy even though those permanent policies will likely also have the ADB rider built-in as well.
It is also important to note that the ADB rider is relatively new and seniors who purchased insurance their life insurance before the late 1980s will not likely have this important rider available to them. For policyholders that have permanent life insurance policies with low face amounts like $20,000 or $30,000, claiming the ADB will typically reduce the death benefit to an amount that wouldn’t cover the cost of an average funeral so policyholders should beware.
To learn more about the Accelerated Death Benefit and any other riders that are available for your life insurance, speak to an experienced and reputable independent insurance broker like LifeInsure.com to see which riders are the best fit for your circumstances.