The Basics of Accelerated Death Benefits
Death benefits—as morbid as the term may be—are key to maintaining your family’s financial security in the event of your death. With many life insurance policies, you will spend much of your lifetime “paying into” a certain financial asset. Then your family will receive a “payout” when you pass away.
But sometimes, you or your family may need access to that “payout” before you pass away. Since you’ve dedicated effort to secure these benefits, you have a reasonable right to want to access them early. Accelerated death benefits, sometimes called “living benefits,” speed up the payout of your life insurance policy, tax-free. This allows you to access benefits if you are deemed either terminally, critically, or chronically ill.
Types of Accelerated Death Benefit Riders
The actual requirements for receiving accelerated death benefits from a rider will vary by policy and insurer. These requirements should be clearly explained by your insurance agent when you purchase the policy. But many people tend to ignore their policy’s fine print or forget about the details until they are actually relevant.
Here’s what you need to know about each type of accelerated death benefit rider:
Terminal Illness Rider
If you receive a diagnosis for a terminal illness, you’ll likely want to access your death benefits early to help cover expenses. A terminal illness rider, also known as an accelerated death benefit (ADB) rider, gives you access to your death benefits if you are diagnosed with less than 12 months to live. This window can also be less than 24 months, though it depends on your insurance company.
Insurance companies are required by law to include a terminal illness rider free of charge to every life insurance policy they sell.
This is because, for a time, terminally ill people couldn’t access their benefits early, outside of selling their life insurance policy in a “viatical settlement.” Insureds wanted to use that death benefits money to help cover end of life expenses.
Based on your policy’s specifics and your financial situation, between 25%- 95% of your death benefits can potentially be accelerated. This way you can use some of your benefits spending time making memories with your family and paying for medical bills.
Critical Illness Rider
A critical illness rider exists to make sure you can cover expenses, should you be diagnosed with, or suffer complications from, a critical illness.
The illnesses that allow for an accelerated payout are outlined within the fine print of the rider. The covered illnesses often include:
- Heart attack
- Kidney failure
These illnesses can come with high costs for treatment over a long period. The accelerated benefits from a critical illness rider can go a long way toward covering them.
If you have questions, or curious if a particular illness is covered, you should absolutely consult your insurance agent before adding the rider.
Chronic Illness Rider
For accelerated death benefits to pay out for a chronic illness rider, the insured must be certified by a doctor that they cannot perform at least two of six “activities for daily life.”
These activities include:
- Dressing yourself
- Using the toilet
- Moving around
If your disability or illness precludes you from doing at least two of these activities and it is certified by your doctor, then you are eligible to access accelerated death benefits via a chronic illness rider.
Reasons You Might Want Accelerated Death Benefits
While you may have bought a term policy to cover expenses early in life, your financial situation may change later on. If you find yourself with a diagnosis for a terminal or critical illness you may want to access those benefits early. Accelerated death benefits can help ease the financial burden associated with these situations.
You can use those funds to pay for a number of different expenses, such as:
- Late in life/unexpected medical expenses.
- An unexpected increase in the cost of living.
- The cost of personal care.
- Moving to a nursing home.
- Extended retirement.
- Seeing extended family.
- Making memories.
- Other personal reasons.
Because there’s such a wide range for how much you’re able to access, it’s a good idea to speak directly with an agent before making any decisions.
Consider this example:
We once had a client who called True Blue Life Insurance looking to sell his policy with American National. He had pancreatic cancer with 16-24 months to live and wanted access to his benefits. Thankfully, we informed him that selling his policy would lose 30-40% of the benefit, leaving him with about $100,000 available. But, American National has a 24-month requirement, so he was actually eligible to receive accelerated death benefits. By telling him about the accelerated death benefits available, he wound up having access to $250,000 instead.
Exploring his options for accelerated death benefits wound up saving him, and his beneficiaries, $150,000 in the long run.
Other Types of Accelerated Death Benefits
Whole Life Benefits/Cash Value
While term life insurance assures your financial security for a given amount of time—often 10 or 20 years—whole life insurance assures that you’ll have protection for your entire life. Additionally, whole (also known as permanent) life insurance is something that is actively building a “cash value” over time.
The longer you wait to access your policy’s cash value, the greater the value will be. The possibility of accumulating cash value is what makes permanent life insurance particularly attractive to insureds. Though, it will require you to be paying a higher monthly premium over time.
The ‘cash value’ component of your whole life insurance policy shouldn’t be treated like risk-free cash. Rather, you should treat it as a perpetual line of credit—cash that you have the right to borrow from, but will need to pay back later. If you don’t pay back the amount you borrow, your total death benefit will eventually begin to decrease. Even though your equity isn’t risk-free, it’s incredibly useful for unexpected expenses and a tremendous benefit of permanent life insurance.
Advantages of Borrowing From Your Policy’s Cash Value
There are a few important advantages to borrowing from the cash value of your life insurance policy. Because you have already paid income tax on the money you have invested in paying your monthly premiums, withdrawing from the cash value of your life insurance policy is tax-free. Depending on the amount of taxation you are subject to for accessing other lines of capital, this can potentially save you a tremendous amount of money over time.
Additionally, these policies allow you to borrow from your accumulated cash value in order to pay your monthly premiums. If you’ve run into a situation where you cannot afford to make your monthly payments—but you don’t want to risk losing your life insurance policy altogether—borrowing from your accumulated cash value can help cover those payments.
Other Ways to Access Your Policy’s Cash Value
A loan is statistically the most common way to access a whole life policy’s cash value, but it is not the only way you can do so. In addition to getting a loan, you may also be eligible to receive periodic dividends. The size of the dividends depends on the amount of cash value you have accumulated.
Naturally, if you have accumulated more cash value, the number of dividends you will receive will be greater. Unlike other capital gains—which are subject to a federal capital gains tax—these dividends are non-taxable. These dividends and the potential income stream they offer help many insureds justify the high premiums with whole life policies.
Once you have a permanent life insurance policy in place, you will begin to accumulate cash value. But what happens if you were to decide you want to cancel your policy altogether? Would you be able to access the equity you have been paying into?
If a permanent life insurance policy is in force for at least three years, you can access “surrender value.” Though you will be ‘surrendering’ the long-term benefits associated with the policy, you will get a substantial portion of the cash value back in return.
The surrender value of your policy should be a last resort, as it causes you to lose the financial security of your permanent life insurance. Another option that is similar to accessing the surrender value is a life settlement. A life settlement is something where the policy itself doesn’t terminate, but instead, you sell the future cash flows (benefits) to a third party in exchange for cash today.
Accelerated death benefits and other benefits can be a great tool when planning for your future. You never know what kind of situation you could run into throughout your life, so these benefits all exist as yet another safety net. Click here if you’d like to learn more about living benefits and life insurance.