Understanding Accelerated Death Benefits
Accelerated Death Benefits (ADB) are a valuable feature that can be added to a life insurance policy. This benefit allows the policyholder to access a portion of the death benefit while still alive, upon being diagnosed with a terminal illness.
Individuals opting for an accelerated death benefit are usually given less than a year to live. The funds received can be used for medical treatments and other expenses required to improve the quality of life during their remaining time.
Key Insights:
- ADB enables terminally ill life insurance policyholders to access a part of the death benefit before passing away.
- These benefits are usually exempt from income tax.
- To qualify for ADB, proof of a chronic or terminal illness is necessary.
- Opting for ADB reduces the amount beneficiaries will receive.
- In some cases, policyholders may be able to borrow against the policy instead of receiving a lump sum.
Understanding How Accelerated Death Benefits Work
Choosing a life insurance policy with an ADB feature allows policyholders to manage their daily expenses and financial obligations, ensuring comfort for themselves and their families after they pass away. Initially implemented in the late 1980s to support individuals diagnosed with AIDS, this benefit has since been extended to other terminal illnesses.
The accelerated death benefit provision, also known as a “living benefit” rider or “terminal illness benefit,” can be a beneficial addition.
Eligibility for accelerated death benefits can include diagnosis of a terminal illness with a life expectancy of under two years, organ transplant necessity, long-term hospice care, or the need for daily assistance with tasks like personal hygiene.
The cost of a living benefit may vary based on the insurance provider and policy terms. It can either be included in the policy or incurred as an additional fee or percentage of the death benefit.
Receiving accelerated death benefits may impact eligibility for Medicaid and SSI programs.
Illustration of Accelerated Death Benefits
Let’s consider an example: Fred, a 40-year-old with a $1 million life insurance policy, diagnosed with terminal brain cancer. Fred chose to accelerate $500,000 of his policy and received a lump sum of $265,000.
After accepting the offer, Fred’s death benefit reduced by $500,000, and his new premiums were adjusted accordingly.
Special Considerations
Accelerated death benefits are usually tax-free for individuals with a life expectancy of less than two years. They are not meant to replace long-term care insurance but rather to supplement expenses not covered by such policies.
What Is the Purpose of Accelerated Death Benefits?
Accelerated death benefits serve to aid terminally ill individuals with life insurance by providing access to a portion of their death benefit before their passing. This financial assistance is intended to cover healthcare expenses, with the trade-off being a reduction in the total death benefit.
What Is an Accelerated Death Benefit Rider?
An Accelerated Death Benefit (ADB) rider is an extra feature attached to an insurance policy that allows the policyholder to access a portion of the death benefit in case of terminal illness.
Cost of ADB Riders on Life Insurance Policies
Most insurance providers include the ADB rider in their policies at no additional cost to the policyholder.