Terminal Illness Accelerated Death Benefit

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Most life insurance policies have a provision called the accelerated death benefit (ADB) for terminal illness. This rider allows you to receive a portion of your life insurance death benefit to use while you’re still living, if you have a terminal illness with a shortened life expectancy. Depending on the company, they may require your life expectancy to be between six months and two years. The accelerated death benefit is also known as a “living benefit” rider or “terminal illness benefit.”

Taking accelerated death benefits will reduce the amount of money received by your beneficiaries.


Fees and restrictions

Most companies offer these benefits at no additional premium, instead they charge you for the option when it is used. Other insurance companies will charge an additional premium for the accelerated benefits, usually computed as a percentage of the base premium. In most cases, the company will reduce the benefits advanced to the policyholder before death to compensate it for the interest it will lose on its early payout. They also may charge a nominal service fee.

Depending on the company, you may receive 25-100% of your policy’s face value while you’re still living. Then after you die, whatever is left of the death benefit would go to your beneficiaries. The percentage, maximum limit, and restrictions of the accelerated death benefit will differ depending on the company.

Who can apply for the accelerated death benefit?

If you have a terminal condition, you should apply for the Accelerated Death Benefit option. People with other conditions, such as organ failure who are not transplant candidates may also qualify depending on their individual policy and state laws. To qualify, you will need to provide proof to the insurance company from your doctor stating you are terminally ill (6-24 months depending on company).

How can people spend the accelerated death benefit?

Typically, there are not any restrictions on how the money can be used. You can pay for hospital bills, medical expenses, hospice, caregiver, medications, or experimental treatment. Some people pay off debt or make financial arrangements for their family. Others use the funds for daily living expenses or to take a vacation.

Do I pay tax on the accelerated death benefit?

Generally, insurance death benefits, including accelerated death benefits, are federal income tax-free. However, there are a few situations when you may have to pay taxes.

1. Estate Tax

As of 2021, if your estate is worth over $11.7 million, your estate is subject to estate tax.

2. Permanent (Cash Value) Life Insurance

Many permanent life insurance policies have cash value that can grow over time. If you withdraw more money that what you put into the policy, then you may have to pay taxes.

3. Installment Payments

Beneficiaries typically receive death benefits in one lump sum, tax-free. However, if you choose to receive the death benefit in installment payments, they may accrue interest, which can be taxed.

Receiving an accelerated death benefit can affect your eligibility for Medicaid and SSI.

The Bottom Line

Accelerated death benefits can provide valuable funds while you’re still living if you qualify. They are NOT meant to substitute for long-term care insurance coverage. Accelerated death benefits should be used to supplement expenses not covered by a long-term care policy. They’re also different from a chronic care or long-term care rider. Contact your insurance company or agent to find out about details and any policy restrictions. Be sure to consult with your tax and financial advisor before receiving any benefits.

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