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Accelerated benefit riders: How your life insurance can help you while you're still alive

As life expectancy creeps up closer to 80 years old, more Americans are turning to life insurance to help them while they're still alive.

Accelerated benefit riders (ABRs) let policyholders use their policies to pay for care for chronic illness, terminal illness, and long-term care. Some may view it even as a retirement account for their care.

ABRs can help pay hospital bills, travel for care, renovations to help the person stay in the home, or even lost income for the individual or caregiver.

The rider lets you tap into your life insurance, while still leaving your loved ones with the remaining life insurance benefits.

ABRs have picked up in popularity. More than 3 million Americans have ABRs on their life insurance policies and more than 150 companies offer accelerated benefits, according to the Alabama Department of Insurance.

How do accelerated benefit riders work?

ABRs, also called living benefits, are usually riders on life insurance policies, though some plans may include the benefit as a part of the actual policy.

ABRs gives the policyholder funds under certain circumstances, such as if the person is diagnosed with a terminal illness, chronic illness, or needs long-term care. The policy may require that a person who is in long-term care must not be able to perform regular daily functions, including eating, dressing, and bathing.

There are often limitations to these plans. For example, if the policyholder gets a terminal illness, death must be expected within a certain period, such as one year.

Graham Summerlee, vice president of Life Product Development at Lincoln Financial Group, which offers two types of ABRs for long-term care and chronic illness, said the riders "make it easier to facilitate needs-based planning for the potential expenses associated" with care when someone ages. This kind of care can impact retirement plans, savings, assets, and the level of care one receives, said Summerlee.

Summerlee said Lincoln Financial Group's annual What Care Cost found the national average for long-term expenses ranges from $47,840 for a full-time home health aide to $102,911 for a private room in a nursing home.

"ABRs often appeal to individuals interested in planning for potential care needs of the future with a dual-purpose product that eliminates the 'use it or lose it' risk of traditional long-term care insurance. With ABRs, one benefit helps address the financial risks a client faces when chronically ill or in need of long-term care, and the other provides a death benefit in the event that a chronic illness condition or the need for long-term care does not arise," said Summerlee.

Arlene J. Lester, public affairs specialist at State Farm, said ABRs are often for people who can't afford a traditional long-term care policy, but want some protection for long-term care expenses.

"Customers who want to supplement a long-term care insurance policy may find this product desirable," said Lester.

Whatever money is taken from the policy while the person is alive is deducted from the life insurance paid to the beneficiary after the policyholder dies. Life insurance companies usually allow policyholders to get 25 to 100 percent of their death benefit.

How to add a rider to your policy

You can add ABRs onto existing life insurance policies. These types of riders usually cost little and some insurers even offer them for free, but may charge a fee if money is withdrawal while the policyholder is alive.

They are usually added to permanent or whole life insurance policies. However, some life insurance companies now add the riders to their term life insurance policies, too.

Summerlee said people shouldn't wait to add the rider until they are diagnosed with a terminal illness, chronic illness, or need long-term care. Policyholders who wait until then might get denied coverage or may pay a lot more for coverage than a healthier person.

People interested in ABRs should speak with their families and a financial advisor to discuss care preferences, available resources, and potential coverage options, he said.

Insure.com maintains a list of the best life insurance companies based on customer reviews, making choosing a reputable insurer that much easier.

What's the downside to accelerated benefits?

People usually take out life insurance policies because they want to leave something behind for burial or cremation costs, and for daily living expenses. A death can leave a spouse paying a mortgage alone, which can destroy finances.

Accelerated benefits help care for the person while alive, but also leave the survivors with less money after the person dies. So, when deciding when to add the rider and especially whether to tap into the policy through this avenue, the policyholder and family members should run the numbers to see whether it makes financial sense.

You'll also want to check into whether accepting the accelerated benefits funding would affect your tax status or Medicaid eligibility. You may lose Medicaid coverage if you get accelerated benefits funding. Check with your state's Medicaid program before tapping into funds.

How do accelerated benefit riders kick in?

If the policyholder is diagnosed with a covered illness, the person should notify the life insurance company.

The insurer's claims department will review the medical records and provide an estimated payout based on the life expectancy.

If the policyholder accepts, the life insurance company will usually pay a lump sum to the person within a couple of weeks.

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