A life insurance policy offers the peace of mind of knowing your loved ones will be on solid financial ground in the wake of your death. But what happens if you become permanently disabled or terminally ill before you die and need money to pay for ongoing care?
Accelerated benefit rider life insurance allows you to tap into a life insurance benefit while you’re still alive. It gives you access to cash to help cover the financial burden of ongoing medical care.
“People who don’t have much time left and who are using the accelerated death benefit use the money for treatments and other costs needed to stay alive,” says Brad Cummins, insurance agent and founder of Local Life Agents.
Read on to learn more about accelerated death benefit riders and whether they’re right for you.
- An accelerated death benefit rider lets you tap into your life insurance while you’re still alive.
- You can only take money from an accelerated benefit rider if you meet your policy’s requirements to get those funds.
- These riders can help pay for hospital, long-term care, nursing home and hospice care.
- Money taken for accelerated benefits reduces the policy’s value, which means a lower death benefit payment.
What is an accelerated benefit rider?
Accelerated benefit riders are living benefits that allow a policyholder to tap into life insurance proceeds before dying.
The money advanced to the policy owner can be used for qualifying care, such as:
- Medical care after being diagnosed with a terminal illness
- Long-term care near the end of life
- Ongoing care after being diagnosed with a medically debilitating condition
Graham Summerlee, vice president of life product development and pricing at Lincoln Financial Group, says 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, says Summerlee.
“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.
Some life insurance policies have an accelerated death benefit built-in, with the cost included as part of your policy premium. In other cases, policyholders can add the coverage as a rider to their life insurance policy.
Accelerated death benefits can help policyholders pay for needed medical care. However, there is a major drawback.
“The benefit paid in an accelerated death benefit will also reduce the death benefit to the beneficiaries,” Cummins says.
In other words, if you purchased life insurance to make sure your family’s finances would remain strong in the event of your death, know that using your accelerated death benefit will leave less money for loved ones after you are gone.
How does accelerated benefit work?
The possibility of something grave happening to us, such as being diagnosed with a terminal illness or becoming the victim of a catastrophic and life-altering accident, is always present.
An accelerated living benefit rider provides a pool of money that you can turn to in the wake of such an event.
“You can get money from the death benefit in the form of cash advances,” Cummins says.
The benefit can be used to pay for things like treatment costs or stays in a facility. For example, someone diagnosed with a terminal disease could use an accelerated death benefit rider to help pay for in-home nursing or hospice care.
Or someone with a chronic illness who can’t care for herself might use an accelerated benefit rider to help pay for a stay in a long-term care facility.
In addition, an accelerated death benefit rider can pay for things such as:
- Hospital bills
- Travel for care
- Renovations to help the person stay in the home
- Lost income for the individual or caregiver
Money from an accelerated benefit can be used in ways that help your entire family during a difficult time, Cummins says.
“The cash can also allow family members to have the money needed to stop working to care for you,” he says.
Typically, life insurance policyholders can begin to use their accelerated benefit if they meet certain conditions.
When do you become eligible for accelerated death benefit life insurance coverage?
You might become eligible for the benefit if you’re diagnosed with a terminal medical condition and have a life expectancy of 12 months or less. Other insurance companies may extend that period, such as up to 24 months.
The amount of accelerated benefit you can withdraw typically is limited to a percentage of the policy’s overall death benefit payment. A policy may limit the accelerated benefit to 50% of your death benefit, or $500,000, whichever comes first, for example.
To access money via an accelerated death benefit rider, let your life insurance company know that you have been diagnosed with a covered illness.
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 give a lump sum payment to the person within a couple of weeks.
Remember, once you start using the accelerated death benefit, it reduces the death benefit payout to your beneficiaries after your death. Typically, the reduction will be on a dollar-for-dollar basis.
For example, if you use the accelerated benefit to cover $100,000 in medical care costs, your beneficiaries will receive $100,000 less in death benefits after you die.
What are types of accelerated benefit riders?
Accelerated death benefit riders offer different types of coverage depending on the nature of the rider. Here are some of the most common types of riders.
Critical illness rider
A critical illness accelerated benefit rider typically pays a lump-sum benefit to those diagnosed with a covered condition. Examples of such conditions may include:
- Cardiac arrest
- Heart attack
- Kidney failure
The rider also may pay if you need certain procedures, such as a major organ transplant or heart valve replacement.
Chronic illness rider
With this type of rider, the insured typically qualifies to take the accelerated death benefit after being diagnosed with a permanent medical condition in which the insured meets one of the following criteria:
- Diagnosed with a severe cognitive impairment
- Permanently unable to perform at least two of the six activities of daily living — bathing, continence, dressing, eating, toileting and transferring
Funds associated with a chronic illness rider typically are paid out in a lump sum.
Long-term care rider
This type of rider typically kicks in when the insured either is diagnosed with an illness or is involved in an accident that leaves him or her unable to perform at least two activities of daily living for at least 90 days. Payments may be a lump sum or monthly.
How much does accelerated benefit cost?
An accelerated death benefit rider is often included as part of an insurance company’s life insurance policy at no added cost. So, you may find a life insurance policy with the rider and not have to pay higher premiums.
Some insurance companies and policies may require you to purchase this coverage at an additional cost. And even if the policy is included at no extra charge, you might pay fees when using the rider to obtain payouts.
Accelerated benefit rider taxation
An accelerated death benefit rider can provide you with an important way to fund medical care costs. In many cases, the payments are tax-free.
The IRS says accelerated death benefits are excluded from taxation if the insured is terminally ill.
Chronically ill individuals also don’t pay tax on their accelerated benefit if they use the rider to pay for costs incurred for qualified long-term care services.
However, in other situations, you may owe taxes on the cash you withdraw. For example, accelerated death benefits paid to someone who is chronically ill on a per diem or other periodic basis are only excludable up to certain limits.
When you receive these payments, they may generate a 1099 LTC form that reports the payments to the IRS. You can learn more about the tax implications of accelerated benefits in IRS Publication 525, “Taxable and Nontaxable Income.” Consulting a tax professional also is wise before you take any accelerated death benefits.
Using your accelerated death benefit rider can have other financial implications as well. Accepting accelerated benefits funding might 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.
Also, while accelerated benefits help care for the person while alive, using this tool leaves survivors with less money after the insured 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.