What are accelerated death benefits and how do I use them?

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What are accelerated death benefits and how do I use them?

Life insurance ordinarily pays benefits to a beneficiary after the insured person dies. You buy life insurance to protect those who depend on you for financial security if you die prematurely. Life insurance provides your dependents with the ongoing income they will need to live on, as planned, when your income no longer exists. But your life insurance may also provide you, the policy holder, with certain living benefits that you could use in the event you become seriously or terminally ill. Accelerated or living benefits may be included in a policy when purchased, or attached as a rider.

What is an accelerated death benefit or ADB?

Accelerated Death Benefits allow you to receive a portion of your life insurance benefit early, to use while you are still living. This benefit can be used to offset costs associated with a chronic or terminal medical condition. According to the American Council of Life Insurers, accelerated benefits can range from 25% to 95% of your policy’s death benefit. The following medical circumstances usually trigger eligibility of early payment:

  • Terminal illness with death expected within 24 months.
  • Acute illness, such as severe heart disease or AIDS, which would result in a drastically reduced life span without extensive and immediate treatment.
  • Catastrophic illness requiring extraordinary treatment, such as an organ transplant.
  • Long term care needed because you cannot perform daily living activities like bathing, dressing, or eating.
  • Permanent confinement in a nursing home.

There are generally no restrictions as to how your accelerated death benefits can be used. They can be used to help pay hospital bills, for medications, or other treatments, etc. But it is important to keep in mind that the benefits from an ADB rider are limited and meant to alleviate end of life financial hardships. They do not take the place of comprehensive health insurance or long term care insurance.

Benefits are paid out according to the policy or riders. Sometimes payments are made monthly, others are paid in a lump sum. Some policies allow you to choose the method of payment. In most cases, accelerated benefits are not subject to federal income taxes. It is also very important to remember that the amount paid to your beneficiary is reduced by the amount you received as an accelerated benefit and also by any outstanding loans against your life insurance, and that there may be service charges.

Questions to consider before taking an accelerated benefit

  • How will accelerating payments affect my survivors? Since life insurance is usually purchased to protect a spouse, children, or other dependents from financial issues, if you use part or all of the policy benefits, there may not be enough left, after your death, to fund the things you planned for.
  • Are there better ways to cover the high cost of serious or terminal illness? Accelerated benefits are finite and meant to help with end of life financial burdens. They do not replace comprehensive health insurance or long term care insurance, which are designed to cover medical and nursing assistance costs.
  • Will collecting accelerated benefits affect Medicaid? You cannot be forced to use accelerated benefits from your life insurance policy before qualifying for Medicaid. But, if you choose to receive ADB, that money may be considered income and that might affect your Medicaid eligibility.
  • If I received accelerated benefits and did not die, do I have to pay the money back? If your insurer pays out your ADB claim and your health improves, you don’t have to pay the money back to your insurance company. But, filing a false claim or hiding or omitting information to get the benefit is considered fraud and may be subject to criminal or civil penalties.
  • Will my insurer cancel my policy if they know I have a terminal illness or am disabled because I apply for accelerated benefits? Your policy can’t be canceled as long as you continue to pay the premiums.

Talk to your insurance professional

It is important that you understand your life insurance policies. Talk to an independent agent at Foundation Insurance Group to make sure you have the right coverages to ensure that both you and your dependents are taken care of both while you’re living and into the future.

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