What Is an Accelerated Life Insurance Benefit?
- Learn how an accelerated death benefit can help those diagnosed with a terminal illness. This article explains how these benefits work and when they are paid.
Accelerated death benefits (ADBs) are also known as accelerated life insurance benefits. Some policies also refer to these as terminal illness benefits. ADBs pay a portion of a life insurance policy before death if the policyholder is diagnosed with a terminal illness.
Accelerated benefits are a type of living benefit rider that can be included when a life insurance policy is purchased. They are often available at no extra cost.
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How Does an Accelerated Death Benefit Work?
ADBs pay a portion of a policy's total benefit to a life insurance owner who has been diagnosed with a terminal illness. Some policies only pay a portion of the policy value, while others pay the full life insurance benefit. The insured receives the money before death to pay for medical bills, nursing care or other expenses. Most policies don't restrict how the insured can use the benefit money, allowing for comfort and flexibility at the end of life.
Accelerated benefits are not additional life insurance money. They simply allow the policyholder to access insurance money before death. The insurance company subtracts accelerated benefits from the total amount to be paid after the insured's death. Any payment to beneficiaries is reduced by the amount of accelerated benefits the insurance company paid.
When Would an Insurer Pay Accelerated Death Benefits?
Most insurance companies require a doctor's certification stating that the insured is terminally ill. Insurance companies and policies have varying life expectancy requirements. Typically, policies may define terminal illness to mean a life expectancy in the range of 6 to 24 months. The insurance company also needs a medical release from the policyholder, which lets the insurance company review medical records and confirm the diagnosis.
Some life insurance policies include accelerated benefit riders that are available even if the insured isn't terminally ill. These include:
- Critical illness riders pay accelerated benefits if the insured would die without significant medical care. For example, benefits may be available to a policyholder diagnosed with cancer or Lou Gehrig's disease.
- Chronic illness riders pay if an illness is survivable but permanently prevents the insured from performing daily activities like bathing, eating, dressing and toileting.
- Long-term care riders may pay accelerated benefits if the insured must permanently remain in a nursing home. However, long-term care is usually a different type of rider.
Once the policyholder submits an application for accelerated death benefits along with a doctor's certification and medical release, the insurance company processes the claim. The insurance company can usually pay an approved ABD claim to the insured within four to six weeks of the application. Insurance companies often pay ADBs as a lump sum, but sometimes pay in monthly or other periodic installments.
Limitations of Accelerated Death Benefits
Perhaps the most obvious downside of ADBs is that they reduce the total amount of life insurance available to the beneficiaries after the policyholder's death. Each policyholder must determine the best use of their life insurance funds since ADBs don't increase the total policy benefit.
While many policies include ADB riders at no extra cost, this is not true for all life insurance. Lower-value policies or final expense life insurance may not offer any accelerated benefits. Some policies treat ADBs as a lien on the total benefit amount, which means interest will accrue. The insurance company takes the owed interest out of the final amount paid to beneficiaries. Other life policies may require a fee for processing or receiving ADBs.
Accelerated life insurance benefits can impact taxes, Medicaid eligibility and supplemental social security income (SSI). Taxes aren't usually owed on life insurance payments, including accelerated benefits. However, if the policy includes investment components or cash value, the insured may owe taxes. People suffering from a terminal illness or a long-term disability may qualify for Medicaid or SSI, but both programs have income and asset limits. Receiving accelerated life insurance benefits can interfere with a person's eligibility for one or both of these programs.
What Does Increasing Death Benefit Mean?
An accelerated death benefit and an increasing death benefit are not the same and shouldn't be confused. An increasing death benefit refers to life insurance that increases in value over time. These policies are worth the face value of the benefit plus some amount that can grow. The growth may be due to the policyholder paying additional cash into the policy or an investment component.