Life insurance living benefits provide cash for the terminally ill

For the terminally ill, a living benefit (also called an accelerated death benefit, or ADB) can be a saving grace.

A living benefit is a rider that can be added to a life insurance policy, either at the time of purchase or after. It allows terminally ill patients to access a portion of their life insurance proceeds before death.

Living death benefits have been around since the 1980s, when they were first offered to HIV/AIDS patients. Since that time, the option of a living benefit has expanded to include a number of terminal illnesses such as cancer, stroke and kidney failure.

Proceeds from a living benefit are deducted from the life insurance policy's face value and can be received either in a lump sum or in monthly payments. Depending on the life insurance company, the benefit is often automatically included in an insurance policy at little or no cost. It can also be added later. The policyholder can use the benefit for anything, including paying off medical debt, starting a college fund for a child or taking a once-in-a-lifetime vacation.

According to the U.S. Department of Health and Human Services, you can access a living benefit when:

• You have a terminal illness and death is likely to occur within a specified amount of time, such as 24 months.

• You will be permanently confined to a nursing home.

• You can't perform "activities of daily living" such as bathing or toileting on your own.

The income from a living benefit is not subject to federal income tax, provided it meets certain criteria. In most states, the living benefit is not subject to state income tax. To qualify for a tax-free exemption on the benefit, the policyholder must be classified as "terminally ill" when he files his income taxes. A tax advisor can tell you if you qualify.

How much will you get?

Living benefits typically pay out 50 to 80 percent of the policy's face value, according to the Illinois Department of Insurance. Some states allow insurance companies to also pay living benefits to policyholders who may not be "terminally ill" but who have certain medical conditions. For example, in Illinois, life insurers can pay up to 75 percent of the policy's face value for people with heart attack, Alzheimer's disease or organ transplants.

If you take a living benefit payment, you must keep paying premiums to keep the policy in force if you want your beneficiaries to receive the remainder. The insurer will charge interest on what you receive from a living benefit. This will reduce the amount your beneficiaries receive after your death. Some insurers limit the amount of the death benefit you can receive by setting a maximum percentage that may be taken as a living benefit or by capping the dollar amount. Remember also that receiving money from a living benefit can affect your eligibility for Medicaid and supplemental security income (SSI).