Accelerated Death Benefit Riders

Life insurance contracts can include clauses or add-ons called riders, which provide additional or supplementary benefit(s) for the policyholder.  One such rider which can be added to a life insurance contract is called an Accelerated Death Benefit. Accelerated death benefit riders may carry an extra cost, or may come as a rider that does not require additional premium.

How Accelerated Death Benefits Work

Under certain health conditions, an accelerated death benefit provision allows the policy owner to receive part of the death benefit before the insured actually dies. This money can be used to help with extra expenses or to create memories during the lifetime of a person with chronic, critical, or terminal health issues. 

Cost to Accelerate Death Benefits

With most life insurance companies, the Accelerated Death Benefit can be added to a life insurance contract without having to increase the premiums paid for the policy. However, insurance companies do charge a flat fee to access accelerated death benefits. Moreover, the IRS can assess taxes on accelerated death benefits, especially if those funds exceed the allowance of per day benefits for long-term care.  

 Fortunately, there are no restrictions on how the accelerated death benefit funds are spent.  The funds can be used as the policy owner sees fit. Even so, the premium for the minimum base death benefit, plus any paid riders, must be maintained after accelerated benefits are paid out, otherwise, the policy could lapse and create a tax liability when the payout exceeds the total premiums paid.

As a Financial “Safety Net” for Medical Expenses

Accelerated death benefits are added to a life insurance contract to act as a financial safety net. They may be used to assist in mitigating the financial impact of catastrophic medical events in the insured’s lifetime. As medical costs have risen, medical expenses have become the number one reason for bankruptcy. Today over 6 of every 10 bankruptcies are due to medical expenses.  The use of accelerated death benefit riders could significantly lessen this unfortunate statistic.

Types of Accelerated Death Benefit Riders:

1.     Terminal Illness Rider
   1. Is a rider that is added to a policy allowing the policyholder to accelerate a portion of the death benefit of the policy prior to death if the insured has been pronounced terminally ill (i.e., either 12 or 24 months to live depending on which state the contract is issued in). 
   2. Typically, the funds accessible via a terminal illness rider are limited to a percentage of the death benefit and are capped at a specific value. 
   3. For example, a term policy with a death benefit of $500,000 may define the terminal illness rider as 90% of the death benefit, which would be $450,000.  But a term policy with a death benefit of $2,000,000 may not payout 90% of the death benefit but perhaps only a maximum of $1,500,000.
   4. Permanent life insurance contracts such as universal and whole life policies, typically have a lower percentage available for accelerated death benefits because there is a greater risk owner of these policies will actually file an accelerated death benefit claim.
   5. Therefore, permanent life insurance contracts which have accelerated death benefit riders typically limit the terminal illness rider benefits to no more than 75% of the total death benefit in the contract at the time the claim is filed.
2.     Chronic Illness Rider
   1. The chronic illness rider is an accelerated death benefits rider that can be added to permanent insurance contracts. This accelerated death benefit allows the policyholder to access a portion of the total death benefit (typically around 50%) when the insured can no longer perform two of the six daily living requirements necessary for independent living.
   2. The daily living requirements considered to be the components of independent living are dressing, toileting, transferring, continence, eating, bathing, or severe cognitive impairment.
   3. A diagnosis or inability to perform any two of these six may justify a claim for accelerated death benefits due to chronic illness.
   4. Many policyholders find the use of the accelerated death benefits for chronic illness to be beneficial when assisted living or long-term care is necessary. Even though this rider is NOT a long-term care policy and can’t be marketed as such, it can be used to help pay for these services as needed.
3.     Critical Illness Rider
   1. This accelerated death benefit rider can be added to a permanent life insurance contract and a claim can be filed by the policyholders if the insured suffers from a critical illness such as a heart attack, stroke, organ transplant, kidney failure, aggressive cancer diagnosis, and/or treatment, etc.
   2. The total availability of funds accessed via this accelerated death benefit is typically limited to 25% of the total death benefit in the permanent life insurance contract.

More Benefits of an Accelerated Death Benefit

Accelerated death benefits can lessen the financial stress of those who face catastrophic expenses due to medical conditions. Health insurance may pay for some or all of the doctor and hospital bills but living expenses and transportation costs could still be crippling financially. An accelerated death benefit can fill in where health insurance can’t.  Disability insurance isn’t readily available for those over 65 but accelerated death benefits are, and they typically are accessible through age 110. This makes accelerated death benefits more consistent and reliable for those who may need to tap into those funds for a future critical, chronic, or terminal illness.

Conclusion

Purchasing whole life insurance with terminal, chronic and critical illness accelerated death benefit riders provides an immense amount of security.  Fortunately, the sooner this type of life insurance is purchased the lower the cost, making accelerated death benefit riders attached to a guaranteed whole life policy, one of the best-guaranteed values available in the financial world today. At McFie Insurancewe specialize in designing permanent whole life insurance which almost always includes a rider for Accelerated Death Benefits. Schedule a strategy session to talk with our team, or call today at 702-660-7000.