What’s an Accelerated Death Benefit Rider for Life Insurance

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People buy life insurance to provide financial support to people who rely on them financially if they die unexpectedly. It’s an unselfish purchase made for the benefit of people you love.

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In some instances, even though you bought it for someone else, you can directly benefit from owning the policy by using a policy feature known as the accelerated death benefit rider. With this rider, you’ll receive a portion of your life insurance policy’s death benefit while you’re still alive. It can help pay medical bills or other expenses during a very trying time.

How Does An Accelerated Death Benefit Rider for Life Insurance Work?

An accelerated death benefit rider (ADB) gives you access to a portion of your life insurance policy’s death benefit before you die. Typically, you must prove that you have a terminal illness with a life expectancy of 24 months or less. 

The purpose of the ADB is to help you cover expenses associated with your terminal illness, like medical bills or the cost of care, but you’re free to spend the money however you wish.

In addition to letting you apply for an accelerated death benefit due to a diagnosis of a terminal illness, some life insurance companies will allow you to apply for accelerated death benefits if:

  • You’re diagnosed with a chronic or critical illness that may shorten your life expectancy. Cancer, heart disease, heart attack, stroke, coma, kidney failure, paralysis, or amyotrophic lateral sclerosis (often known as ALS) are commonly approved by life insurers for payment of the ADB.
  • You have a catastrophic illness requiring extraordinary treatment, like an organ transplant or continuous life support.
  • You need long-term care. This is typically approved if you can no longer perform two or more activities of daily living (ADL), which include bathing, dressing, eating, toileting, transferring, or controlling your bladder or bowels. 
  • You’re permanently confined to a nursing home. Depending on the life insurance company, you may be eligible for ADB benefits if you’ve been confined to a nursing home for at least six months and you’re expected to remain there.

The amount of money you can access is determined by the insurance company, your state of residence, and your policy’s face amount. Most insurers will let you withdraw anywhere from 25% to 95% of the death benefit. 

If you have a permanent life insurance policy, like whole or universal life insurance, your insurer will reduce the ADB payout by any outstanding loans against your policy. Benefits are typically paid out in a lump sum.

How Much Does an Accelerated Death Benefit Rider for Life Insurance Cost?

Most life insurance companies don’t charge for the accelerated death benefit rider; it’s a built-in feature of your policy. However, some insurers offer the rider as an option that you have to pay for, which will increase the total cost of your life insurance premium. The price will vary by insurer.

If you end up using the ADB, your life insurer will likely charge you an administrative fee that they will deduct from the payment you’ll be receiving.

What Else You Should Know About the Accelerated Death Benefit Rider

While accelerated death benefit riders are helpful in many situations, they have their drawbacks, including the following:

  • They might affect your Medicaid and Supplemental Security Income eligibility. These two programs help low-income families, and the lump sum benefit you receive from an ADB can impact your financial status. For example, it could cause you to no longer qualify for government funds. Before you apply for the ADB benefit with your life insurer, you may want to consult with your caseworker or financial advisor before making any decisions.
  • The tax law isn’t clear. When you collect ADB benefits, you have to file form 1099-LTC with the Internal Revenue Service. Payments are usually tax-free, but there are some exceptions. For example, if you decide you want to receive the ADB payment in installments instead of as a lump sum, those payments could accrue interest, which can then be taxed as income.

If you’re considering applying for ADB benefits, first consult your tax advisor.

  • Your beneficiaries will receive a lower death benefit when you die. Because the payout they’ll receive will be less than you originally intended, their standard of living after you pass away might be adversely affected. It could impact their ability to remain in the family home, pay college costs for the children, pay installment loans, and many other expenses.
  • ADB benefits don’t replace health insurance or long-term care insurance. Though accelerated death benefit riders help you pay for expenses that aren’t covered by health insurance or long-term care insurance, they don’t offer comprehensive coverage and aren’t intended to be a substitute for those policies.

Alternatives to Accelerated Death Benefit Riders

Even though it may be comforting to know that you could access a portion of your life insurance policy’s death benefit if you need to, the accelerated death benefit rider isn’t something everyone adds to their policy. There are other options to consider, including these:

  • Borrow from your permanent life policy’s cash value. If you’ve had your whole life or universal life policy for a while, there may be enough cash that has accumulated that you could borrow. However, keep in mind that any unpaid loan amounts will be deducted from your death benefit when you die. 
  • Surrender your permanent life insurance policy. If you decide that you no longer need or want life insurance protection, you have the option of surrendering your policy and collecting some cash. 
  • Buy long-term care insurance. Most long-term care policies have a provision that the policy will begin to pay benefits if you become chronically or terminally ill, which could help you avoid having to use your life insurance or savings. Your long-term care policy covers expenses like nursing home or home health care costs for anywhere from two years to a lifetime.
  • Use a life settlement. If you’re over 65, there is the chance that you could sell your life insurance policy and receive a lump sum payment. Life settlement brokers handle these transactions. You’ll need to have a permanent life insurance policy (most buyers prefer universal life insurance policies).

Frequently Asked Questions About Accelerated Death Benefit Riders

What’s the difference between accelerated death benefits and viatical settlements?

Both of these options are similar in that they’re designed to help terminally ill insured individuals access their life insurance death benefit before they die. The similarities pretty much end there.

With a viatical settlement, a third party buys your policy, typically pays 55% to 80% of the face amount, and then takes ownership of the policy, including paying the premiums. You remain as the insured, and the third party will receive the full death benefit when you die. 

In comparison, the ADB rider allows you to access money from your policy while you’re alive, but you don’t have to sell your coverage.

Since they are somewhat complex and have had some unscrupulous individuals take advantage of terminally ill people, viatical settlements are regulated by some states. Check with your state insurance department if this is something you’re interested in.

Can my insurance company cancel my policy if it finds out that I’m terminally ill?

Absolutely not. An insurer is not legally allowed to change or cancel your coverage if your health declines, as long as you continue to pay your premiums. 

If I receive accelerated death benefit payments, do I have to return the money to the insurance company?

No, you don’t. Once the life insurance company has approved your application to exercise your ADB and has paid out the money to you, it’s yours to keep, even if your health improves. 

To avoid fraud, insurance companies underwrite and approve claims only after they have received supporting documentation from members of your healthcare team. Some people have been known to fake an illness to collect a benefit when they’re not really ill but are in the mood for a vacation or have something they want to purchase.

Can my spouse or child use my policy’s accelerated death benefit?

Not if you have an individual life insurance policy. But some group life insurance policies do contain a provision allowing spouses and dependent children to apply for accelerated death benefits. Your human resources or benefits coordinator can let you know if your group life insurance policy allows this. 

Is an accidental death benefit rider the same as an accelerated death benefit rider?

No, they’re not the same. An accidental death benefit rider added to your life insurance policy will cause your beneficiaries named in your policy to receive an additional payout if you die due to a covered accident, such as a car accident, plane crash, or drowning. 

The accidental death benefit rider is also known as a “double indemnity” rider because it essentially doubles the money your loved ones receive.

This rider is often confused with a standalone accidental death policy. However, those policies only pay a death benefit if you die due to an accident, not if you die from another cause, like illness or natural causes.

Is an Accelerated Death Benefit Rider Worth It? 

Like any rider, the ADB has limitations, but it can help you get your affairs in order and relieve financial pressure for you and your family when you’re terminally ill.

If your life insurance company offers the rider as a built-in feature at no cost to you, you have nothing to lose by adding it to your policy. If you have to purchase it, it’s not an expensive rider, but weigh the cost and implications before you make your decision.

Also, you could skip the rider if you have enough savings or investments to cover unexpected medical bills and expenses.

Customize Your Life Insurance Policy     

The accidental death benefit rider, and all of the other riders the insurer adds to a policy, are essential because they give you the benefit of customizing and personalizing your life insurance policy. Be sure to have your life insurance agent tell you about all of the available riders on the policy you’re interested in. You can’t add them after your policy has been issued, so take your time and do your homework up front.

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