Accelerated Death Benefits are a provision in a life insurance policy that allows the policy owner to receive a partial payout of their death benefits while they are still alive. Usually, life insurance policies are paid out to the beneficiaries of the policy owner, when the insured dies. But life insurance policies that have a provision for an accelerated death benefit rider can receive a lump sum payment if the insured is terminally ill or has been diagnosed with a chronic illness. This is why an accelerated death benefit, as an insurance rider, is also known as “terminal illness benefit” or as a “living benefit” rider.
What are Accelerated Death Benefits/Living Benefits?
Accelerated Death Benefits (ABD) is an insurance rider or an add-on that lets the policy owner receive a partial payment from their death benefit. It is a common feature of most life insurance policies, and its purpose is to allow the policy owner a payout when they have been diagnosed with a terminal illness or a chronic illness.
Most insurance companies have a provision for accelerated death benefits in their policy, but the payout that a policyholder receives can vary depending on the guidelines and stipulations set forth by the life insurance policy they have opted for. Usually, the ADB
payout ranges from 50% to 80% of the face value of the life insurance policy.
If you are a policyholder you can qualify for accelerated death benefits if:
- The insured has a terminal illness where life expectancy is between six months and two years.
- The insured has a chronic illness that has made it difficult to perform the activities of daily living, regardless of life span.
- The insured has a serious medical condition or are being treated for a critical illness.
- The insured requires long-term care services.
- The insured is elderly and requires private care or a nursing home.
How does Accelerated Death Benefits Work?
Life insurance policies will have the option to let the policyholder choose an insurance rider with a provision for accelerated death benefits. While the intent behind choosing a life insurance policy is to ensure that your loved ones, or beneficiaries, are financially covered from the death benefit payout – you can also use the life insurance policy for other purposes.
Accelerated death benefits are one of the ways you can gain access to a portion of your death benefit payout. This can be useful if you have been diagnosed with a terminal illness or a chronic illness. You can use the payout from ADB towards any medical bills, end-of-life comfort, or even for long-term care.
Most insurers have a provision for accelerated death benefits in their life insurance policies. Even if you have a policy that does not have any provision for ADB, there is the possibility that your life insurance company will make the option available to you as long as you qualify for ADB because of a terminal illness or chronic illness. If your illness has considerably reduced your life expectancy, affected your ability to perform daily activities, made you dependent on long-term care, or has made you need treatments including organ transplants – then you will most likely qualify for accelerated death benefits.
If you qualify for ADB, there are a few things you need to keep in mind:
- The accelerated death benefit payment will impact your payout from policy – the ADB amount will be deducted from the total death benefits.
- Since the ADB pays out a part of your total death benefits payment, your loved ones may still receive a portion of your death benefit amount after you pass away.
- Whether your ADB comes at an additional cost will depend on your insurance company.
What do Accelerated Death Benefits/ Living Benefits Cover?
If you have a terminal illness or are chronically sick, then you may qualify for accelerated death benefits. If you meet the qualifying requirements, then your insurance company will pay a lump sum to you. After you receive the payment, you may use it for medical or other expenses. You may use your ADB payout for:
- Medical bills
- Hospice care, home care, or any other form of long-term care
- Using the services of a private caretaker
- Paying off debts such as a mortgage, loans, etc.
Eligibility for Accelerated Death Benefits
The policyholder of a life insurance policy can qualify for accelerated death benefits as long as they have an illness that impacts their life expectancy, quality of life, or that requires long-term care. As long as the policy owner has a medical diagnosis and medical certification from a professional, most insurance companies will render them eligible for ADB.
The following are the most common reasons why policyholders qualify for accelerated death benefits:
- Terminal illness – the policyholder has a terminal illness and has a life expectancy of less than two years. Some insurance companies may require the policyholder to have a life expectancy of less than six months for them to qualify for ADB.
- Chronic illness – the policyholder has a diagnosis of a chronic illness, and a medical professional has certified that they are not able to perform two or more basic daily activities such as eating, bathing, using the toilet, getting dressed, moving, and continence.
- Critical illness – the policy owner has a critical or catastrophic illness that has a long term survival rate, but that leads to a lower life expectancy or high medical bills. The illnesses that are usually covered include cancer, heart attack, stroke, organ transplant, etc.
- Long-term care – the policyholder is elderly or has an illness that requires long-term care.
An important consideration to keep in mind is that the policy owners who receive an ADB payment may impact qualification for Supplemental Security Income or Medicaid.
Are Accelerated Death Benefits Payouts Taxed?
If you qualify for an accelerated death benefit payout, there is a small chance you may have to pay taxes on it. Whether your ADB payout is taxed or not depends on your individual circumstances. In most cases, as long as your life span does not exceed two years and you receive your payout as a lump sum, you should not have to pay taxes.
ABD payouts are generally made in one lump sum, however, if your payout is in installments that gather interest on the amount, then you can be subject to taxes. If the value of your estate including your death benefit amount is more than $11.7 million, then you will need to pay an estate tax. If you do need to pay taxes on your ADB payout, then consult your tax advisor to know the best course of action for you.
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Q: If I receive ADB payment, will my beneficiaries receive any death benefits?
A: The death benefit amount your beneficiaries receive will depend on your payout. If you received a portion of the face value of your policy, then your loved ones will receive the rest of your death benefits.
Q: Is ADB a viable substitute for health insurance?
A: While ADB payments can be used towards medical bills, they are not a suitable substitute for health insurance or any other long-term care insurance.
Q: If I receive ADB payment, will I still qualify for Medicaid?
A: Your ADB payout can be considered as income - and under the circumstances that your income exceeds Medicaid eligibility, you will no longer qualify for it.
Q: How is ADB different from viatical settlements?
A: An ADB is an advance on your death benefit payment, while a viatical settlement entails that you sell your death benefits to a third party in exchange for a settlement amount.
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