Accelerated death benefit questions? You are not alone
Life insurance offers peace of mind that your family will be financially protected. Not only can it replace lost income and pay for final expenses, some policies offer accelerated death benefits that can be used for long term care or medical expenses.
Few things are as devastating as a terminal illness diagnosis. In addition to the emotional burden, many families must also cope with the financial strain that comes with illness. Medical bills, transportation costs and prescription drugs can take a toll on even the healthiest of budgets. Fortunately, for those with certain life insurance policies, accelerated death benefits may provide relief from mounting expenses.
Accelerated death benefit basics
An accelerated death benefit is a provision that allows insured individuals to collect a portion of their death benefit early. While some insurance companies may require a specific rider be added to a policy to allow for accelerated death benefits, other plans may include them as a standard feature.
For example, according to the American Council of Life Insurers (ACLI), most whole life insurance and universal life insurance policies with death benefits of $25,000 or more include an accelerated benefits option. Some group life insurance and term life insurance policies may also provide for these benefits automatically.
Eligibility to tap into accelerated death benefits can vary depending on your life insurance company and the state in which you reside. State insurance departments regulate life insurance companies, and many have adopted standards by which accelerated death benefits may be offered.
The Interstate Insurance Product Regulation Commission (IIPRC) works to create uniform insurance standards for the 38 member states. In 2007, the IIPRC enacted standards by which a life insurance company may offer accelerated death benefits.
Under those standards, early benefits are available to those who have a medical condition that limits their life expectancy to 6 - 24 months. Life insurance companies may also, at their discretion, offer accelerated death benefits under these three scenarios:
- Diagnosis of a medical condition requiring major medical intervention such as an organ transplant
- Diagnosis of a condition requiring permanent confinement to an institution
- Chronic illness, such as dementia, that limits one's ability to perform daily living tasks
Cost of accelerated death benefits
When you elect to receive accelerated death benefits from your life insurance policy, it is important that you understand you are reducing the payout to your beneficiaries. For example, if you have a $100,000 whole life insurance policy and receive $25,000 in accelerated death benefits, your beneficiaries would be eligible for only $75,000 upon your death.
In addition, some companies may charge a service fee or administrative costs to process accelerated death benefits. These amounts may also reduce the payout available to your beneficiaries.
Finally, while some life insurance companies provide accelerated death benefits as a complementary part of your policy, others may assess a premium surcharge to add the option. When reviewing a life insurance quote, check to determine whether accelerated death benefits are included in the price or need to be added as a rider.
As for the benefits you receive, that money will be tax-free in most cases. According to the IRS, accelerated death benefits used for qualified long-term care expenses are 100 percent tax exempt while benefits used for other purposes are excluded from taxes up to certain limit. It is always best to consult with a tax professional before opting for accelerated death benefits.
Finally, be aware that accelerated death benefits may impact your eligibility for income-based government programs such as Medicaid and food assistance.
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