If you were terminally ill, where would you turn for money? Some life insurance companies allow you to receive money from your policy if you become terminally ill. That money is received in the form of accelerated death benefits (also called living benefits), which give you either a lump sum payment or a monthly payment that is deducted from the policy's face value.
The amount that you may have nothing to do with the existence of any cash value. In fact, you may be eligible to receive accelerated death benefits even though your policy has no cash value at all. What you are doing is taking your death benefit early if you have only one or two years to live.
The following occurrences could trigger an accelerated death benefit:
- Diagnosis of a terminal illness or physical condition for which death is likely to occur within a specified amount of time.
- Occurrence of one of a number of specified medical conditions ("dread diseases" or catastrophic illnesses) that would result in a drastically limited life span without extensive or extraordinary medical treatment.
- The need for an extended period of long term care in a nursing facility, at home, or in the community, due to an inability to perform the "activities of daily living," including one or more of the following: eating, toileting, transferring, bathing, dressing and continence.
- Permanent confinement to a nursing home.
The accelerating of death benefits began in the late 1980s as a way of giving terminally ill AIDS patients a portion of their life insurance proceeds. It has since expanded to include other terminal and chronic illnesses, and evolved into viaticals and then life insurance settlements. The income from an accelerated death benefit is not subject to federal income tax, provided it meets certain requirements, and, in some states, is not subject to state income tax.
Most companies require that your life expectancy be 12 months or less from the time you apply for accelerated death benefits. Most policies specify that you must have a "dread disease" such as a heart disease, life-threatening cancer, stroke or kidney failure. A few companies include a major organ transplant, AIDS, paraplegia and the loss of a limb or eyesight.
Some policies charge you a higher premium for the option of accelerating your death benefit. However, there are others that charge only if the benefit is accelerated, or do not charge at all. Insurers may either reduce the amount advanced to you, reflecting the loss of interest on that money for the company, or treat the monetary advances as liens against the policy, charging interest on the amount advanced.
Restrictions on amount
Some life insurance companies that offer accelerated death benefits will limit the amount of the death benefit you can accelerate, either by restricting the percentage of the death benefit that may be accelerated or by capping the dollar amount. Ordinarily, lump sum distributions are offered, unless state laws restrict such transactions, in which case you will be offered monthly payments.
Many companies allow you to add an accelerated death benefit rider at any time, while some include the rider when you purchase the policy. It can be added at any time. If you're wondering whether or not your individual or group policy contains an accelerated death benefit, contact your agent or insurance company.
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