Life insurance is a way to protect our loved ones from the unknown and create a financial safety net for our families. Accelerated death benefits (ADB) also aim to do just that. An accelerated death benefit is a provision that allows you to obtain a portion of your life insurance before you die so that your family members do not have to financially contribute to your medical care prior to death. We’ll walk you through the details of accelerated death benefit riders.
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How does an accelerated death benefit work?
Most major life insurance policies have accelerated death benefits as a type of partial advanced payment for cash advances. Usually, this lump sum is a percentage of your overall policy amount. Other common names for an accelerated death benefit include the following:
- Living benefit rider
- Terminal illness benefit
- Accelerated death benefit rider
What is the purpose of having an accelerated death benefit on a life insurance policy?
Accelerated death benefits are often for people who need to cover medical expenses, especially near the end of their lives. Accelerated death benefits are a way by which an insured person can receive life insurance benefits while they are still alive.
What is an accelerated death benefit disclosure?
An accelerated death benefit disclosure is similar to any other legal disclosure. A disclosure will provide information regarding significant features of the insurance policy to help potential insurers make an informed decision. Typically, the disclosure will have payment terms and statements regarding things like Medicaid and Social Security.
What is the advantage of accelerated death benefits over a viatical settlement?
Accelerated death benefits allow the insured to keep a portion of their life insurance payout for their beneficiaries after the insured has passed away. Viatical settlements entail the sale of your entire policy, and the investor will become the beneficiary of the life insurance policy. Viatical settlements make it impossible for your loved ones to receive benefits from your policy.
Do I pay tax on a death benefit?
No. Accelerated tax benefits are not seen as income, and as such, they are not taxed. However, a death benefit has the potential to change your Social Security and Medicare status.
Who qualifies for an accelerated death benefit?
A person can qualify for an accelerated death benefit if they have documentation of a chronic or terminal illness from their medical provider. You can also be eligible for an accelerated death benefit if any of the following situations apply to you:
- You have an illness that reduces your lifespan by fewer than two years.
- You are in need of an organ transplant.
- You are in hospice or receiving long-term care.
- You require everyday assistance with personal care.
Example of an accelerated benefit payout
To help you understand how accelerated benefits work, let’s look at an example. John Doe has terminal cancer. The doctor has given him 18 months to live. His medical bills begin to add up, so he considers an accelerated death benefit payment. He has AIG insurance and knows that his insurance will pay up to 50% for a terminal illness rider. He has a $500,000 policy with AIG, meaning he can take out up to $250,000 to cover his medical expenses.
Things to consider before you buy accelerated benefits
Before you rush into purchasing a life insurance policy, you must consider the outcomes of your decision from every angle.
The impact on Medicaid eligibility
Medicaid eligibility relates to your financial status. Often, your Medicaid eligibility will change if you receive an accelerated death benefit. Look into how your Medicaid eligibility will be affected before you apply for an ADB.
The need for separate coverage
Accelerated death benefits are not the same as health insurance or disability insurance policies. You will need to take these policies out separately if you are in need of them.
Terminally ill patients are not required to claim accelerated death benefits as income. Therefore, the benefit is not taxed as income.
Impact on Estate
One of the biggest concerns regarding accelerated death benefits is the impact an accelerated death benefit will have on your estate. Since an ADB is subtracted from the face value of your life insurance policy, it means your estate will decrease in value after you pass away.
Advantages of an accelerated death benefit
You’ll need life insurance to create a well-rounded financial strategy. Whether it’s a survivor benefit plan or life insurance, your loved ones need to feel secure after you have passed. But life insurance can benefit you while you are still alive as well.
The accelerated death benefit is a way to access some of your life insurance benefits while undergoing medical care near the end of your life. With an accelerated death benefit, you can pay for your own medical bills instead of leaving them unpaid after you die. In times of medical emergencies, this can be the right decision for many families.
Disadvantages of an accelerated death benefit
The biggest disadvantage of an accelerated death benefit is that it takes away from the total value of your life insurance policy. So, it may not make the most financial sense if you are concerned about your loved ones’ financial standing after you pass.
Additionally, it can be counterproductive to seek out an ADB if you are on Medicaid. The ADB can disqualify you from Medicaid, and this could end up costing you more money in the long run.
It can also be hard to qualify for an accelerated death benefit because it is based on your projected lifespan. You have to be classified as terminally ill with no more than two years to live in order to qualify for an accelerated death benefit.
Accelerated benefit riders vs viatical settlements
Viatical settlements occur when a life insurance policyholder sells the policy to an investor before their death. The investor then becomes the sole beneficiary of the policy. It is in the investor’s best interest to buy the policy at the end of the policyholder’s life because they will receive a payout much sooner. The policyholder’s family will not receive anything from the life insurance policy after the family member dies.
An accelerated benefits rider is different. It allows the family of the policyholder to receive a portion of the money from the life insurance policy. In this case, a portion of your life insurance policy’s face value will be taken for the sake of covering medical expenses due to a terminal illness.
Choose the right options to keep your family secure
At MoneyLion, we want you to make the most informed financial decisions for yourself and your loved ones. You’ll have options beyond an accelerated death benefit. Check out MoneyLion’s Safety Net feature to learn more about how to manage unexpected life events and protect your family along the way.