When you take out a life insurance policy, there’s the option to customize it with a rider. There are all sorts of different riders to choose from, but one of the most popular is the accelerated death benefit. Now, your next question might be, “what is an accelerated death benefit?” So allow us to explain everything you need to know about accelerated death benefits (ADB) with this guide.
What is an accelerated death benefit?
In short, an accelerated death benefit is a life insurance rider that pays a percentage of the death benefit early if certain conditions are met. These include getting a terminal illness, critical illness, or chronic illness that prevents you from working.
Sometimes the ADB is included in the life insurance policy as an additional feature. Other times, you will need to pay extra to have it in the coverage. The ADB isn’t considered a form of insurance itself and instead functions as an acceleration to the death benefit should you need it.
An accelerated death benefit is also known as a living benefits rider, accelerated living benefits rider, chronic illness rider, terminal illness rider, critical illness rider, and long-term care rider. So if you see any of these names associated with your life insurance policy, they’re most likely referring to the accelerated death benefit.
How does an accelerated death benefit work?
With an accelerated death benefit, you can receive a payout while you’re still alive should you develop an eligible condition. Most ADB riders are only available when the policy is issued, though some can be added at a later date.
An ADB typically pays a percentage of the policy’s death benefit, usually ranging from 25% to 100% in one lump sum or as an ongoing monthly payment. Once the ADB rider is exercised, the insurer pays the funds out of the policy’s death benefit.
But what does that mean for your life insurance beneficiary, who is supposed to receive a payout when you die? They still get the death benefit, but it’s only the amount left over once you’ve received the accelerated death benefit amount.
What does an accelerated death benefit cover?
Accelerated death benefits may have their limits depending on the insurer. As a rule of thumb, however, you can expect it to cover these four categories:
- Chronic illness – a nonrecoverable chronic illness where you’re unable to perform at least two activities of daily living, such as dressing or feeding yourself
- Critical illness – a major heart attack, invasive cancer, paralysis, major organ transplant, or end-stage renal failure all fall under the critical illness category
- Long-term care – you may or may not be considered chronically ill in some long-term care cases, but it still covers an inability to perform two activities of daily living
- Terminal illness – being diagnosed with a terminal illness and a life expectancy of six months to two years, though the time frame usually depends on the insurer.
Are there any tax implications involved?
Unfortunately, there could be some tax-related issues if you receive an ADB. It can impact your eligibility for Medicaid and other public-assistance services. An ADB may also have federal and state tax consequences, though it’s not a given.
Whether or not you’ll need to pay tax depends on factors like your life expectancy, the number of qualified expenses you’ve incurred, and the number of benefits received. It might be worth speaking with a tax advisor before opting for an ADB rider as part of your life insurance.
How can I get an accelerated death benefit?
A growing number of insurers now include ADB as a standard feature in new life insurance policies. They may discount the acceleration of the death benefit depending on your age, gender, and policy specifics like the cash value and a service fee if applicable.
ADBs are much more common with permanent life insurance policies than term coverage. However, they may also be included in some term options, and you might be able to purchase them during your coverage even though they’re typically only available at the start of a policy.
Are there any alternatives to accelerated death benefits?
If for any reason, you decide that an ADB rider isn’t for you, there are other options on the market. These include:
- The cash value – if you’re long enough into your policy, you could instead withdraw the cash value built up throughout the coverage
- Long-term care insurance – getting long-term care insurance can be costly, but it offers benefits that aren’t capped by a percentage of your policy’s death benefit
- Life or viatical settlement – it’s possible to sell your policy in a life or viatical settlement. Doing so ends your coverage but gives you a lump sum amounting to what you sold it for. It may, however, be subject to taxes.
In conclusion: accelerated death benefit
If you were asking, “what is an accelerated death benefit?”, we hope your question has been answered and you’ve been provided plenty of info on the subject. An accelerated death benefit isn’t for everyone, but it can be a handy life insurance rider offering even more peace of mind and keeping financial stability in the household should you no longer be able to work due to illness. For that reason alone, it’s easy to see why an accelerated death benefit is popular.