Accelerated death benefit (ADB) refers to a rider that can be added to a life insurance policy that allows the policyholder to receive a portion of the death benefit while they are still alive. This benefit is sometimes referred to as a “living benefit.”
- Types of Accelerated Death Benefits
- Does my policy have it?
- Am I eligible?
- How much benefit can be advanced?
- How it’s taxed?
Types of Accelerated Death Benefits
There are different types of accelerated death benefits which can serve a different purpose:
- The most common ADB rider allows the policyholder to advance a portion of their death benefit if they are terminally ill.
- Some ADB riders allow the policyholder to advance some of their death benefit in the case of a life-threatening diagnosis.
- Other ADB riders allow the policyholder to use the advance to pay for long-term care services.
- Finally, certain ADB riders allow the policyholder to advance their death benefit if they are permanently confined to a nursing home and are incapable of performing certain certain Activities of Daily Living.
Does my policy have an Accelerated Death Benefit?
The accelerated death benefit is an optional rider. If you purchased coverage that included an ADB rider, accelerating a portion of your death benefit is an option in the case of terminal illness. As a more recent insurance development, many older policies do not provide the option to advance the death benefit. More recently ADBs have become fairly standard and life insurance companies may honor them even if not explicitly mentioned in the policy documents. All types of life insurance policies can have an ADB rider, including term life insurance. The best way to confirm whether your policy has an accelerated death benefit rider is to look through your insurance contract documents or call the life insurance carrier directly.
Am I eligible for an Accelerated Death Benefit?
Accelerated death benefit riders typically require the insured to have a life expectancy under 12 or 24 months, depending on the provider. Both MetLife and New York Life require 12 months or less. Chronic conditions that inhibit activities of daily living or invasive surgeries such as organ transplants may also qualify a policyholder, but eligibility involving chronic illness is determined on a case by case basis and depends on the exact rider. Additionally, face value is considered for an accelerated death benefit. Small policies, generally those under $50,000, are often rejected for accelerated death benefits. Generally all policy types can be eligible for an accelerated death benefit, particularly if they have the rider.
While most policies follow these guidelines, there is one exception to consider. It concerns term-life policies in which the insured is diagnosed with a terminal illness but is nearing the end of their term. In this situation, it is unclear whether the policy can be accelerated. We reached out to several different insurance providers and didn’t get a clear answer. Given the varied responses, in this particular circumstance, it is important to double check with the insurance provider to make sure the policy is eligible for an accelerated death benefit.
How much of the death benefit can I advance?
An accelerated death benefit advances anywhere from 25-95% of the policy’s face value, usually up to $250k and sometimes up to $1M in face value and depending on the policy and the insured’s life expectancy. When considering an accelerated death benefit you should be aware that the benefit amount advanced is not equal to the amount of money paid to the policyholder. The exact proportions vary with every insurance provider, but as a rule, the amount of the policy advanced is always greater than the amount actually paid to the policyholder.
For example, let’s say John owns a policy with a face value of $500,000. He files a claim to accelerate his death benefit, and the life insurance company informs him that they cap the ADB benefit at $250,000 of face value and will advance him $200,000 and reduce his total benefit by $250,000. His policy’s face value decreased by $250,000, but he only received 80% of that amount. This difference is determined using a discount rate calculated by the insurance provider as an adjustment for the time value of money. It varies widely, but as a rule, insurance companies will front a higher percentage of the value requested for shorter life spans.
After an accelerated death benefit the policy has a new face value that is reduced by the percentage of the policy that was accelerated. The policy will have reduced premiums that need to be paid to keep the policy in force. If you are still in need of additional cash, or no longer want to keep paying the premiums you can look into selling the remainder of the policy in a viatical settlement.
How are accelerated death benefits taxed?
Generally, in the case of terminal illness, the lump sum payment is treated the same as a traditional death benefit and is thus income tax-free. This is very similar to the tax treatment of a viatical settlement payout. We have written at length about viatical settlement taxation and encourage you to check with your personal tax advisor.