What Is an Accelerated Death Benefit and How Does It Work?

30-second summary of What is an Accelerated Death Benefit?

Buying a life insurance policy is one of the most unselfish acts any adult can perform. You’ve committed to paying for years on something that will eventually make an incredible difference in someone else’s life.

This article will let you know how you, the policyowner, can receive cash benefits from your life insurance policy’s death benefit while you’re alive. It’s called an accelerated death benefit, and there’s a good chance your policy has this feature.

If you would like to learn more, contact us today to find out if you may qualify for cash benefits.

When you buy a life insurance policy, you buy it for someone else’s benefit. Your ultimate goal is to leave behind a death benefit to the people you care about so they continue to have financial security.

However, life has a way of bringing unexpected events our way. While alive, you may need cash due to a change in your health status. This money may be necessary for such healthcare costs as:

• Medical expenses
• Hospice care
• Nursing home costs
• Private nurse
• Home health care

One of the sources of funds to cover expenses like these is through a feature that most term life and permanent life insurance policies have: an accelerated death benefit rider.

What Is an accelerated death benefit?

An accelerated death benefit (ADB) is a common feature of most life insurance policies and is often available at no additional cost to the policyowner. The ADB allows the policyowner to receive a portion of the policy’s death benefit while they’re still living.

To receive a lump-sum cash payment, the insured must either:

1. Be diagnosed by a medical doctor as having a terminal illness and have under 12 to 24 months to live (depending on the insurer) or
2. Be diagnosed with a chronic condition and be unable to perform two of the six activities of daily living: bathing, continence, toileting, eating, dressing, and transferring.

You can also typically receive an accelerated death benefit if you have a permanent, severe cognitive impairment (i.e., Alzheimer’s disease, dementia) and need substantial supervision.

With most insurers, you’ll no longer be responsible for premium payments once you start receiving an ADB payment, and, in most cases, you won’t have to pay taxes on the payout.

How are accelerated death benefits paid?

Payment of an accelerated death benefit will vary by company.

In some cases, a lump sum payment is made. This is a flat percentage of the death benefit and can range from 25% to 95%, depending on the policy and the insurer.

Some life insurance companies limit the percentage of the death benefit that can be accessed for a chronic illness. For example, your insurer might limit your benefit to 25% of the death benefit per year for up to four years.

Other insurers may use their own formula based on your life expectancy when you request the ADB to be paid, making it difficult to know the specific amount you’ll receive until you need it.

Some life insurers will also charge an administrative or service fee to access the accelerated death benefit.

How are beneficiaries affected by an accelerated death benefit payout?

The death benefit paid to your beneficiaries when you die will be reduced by the amount paid as an accelerated death benefit.

For example, if your policy’s death benefit is $500,000 and you receive a $125,000 accelerated death benefit payment, your beneficiaries will receive $375,000 when you die.

Other options for life insurance policyowners

If your life insurance policy does not have an accelerated death benefit feature, or if it does but you are unable to access it based on your diagnosis, you may be able to withdraw or borrow money from your policy’s cash value if you own a permanent life insurance policy, such as whole life or universal life insurance. Term life policies do not build cash value, so loans or withdrawals can’t be made.

The drawback to this option is that you will still be responsible for paying the premium, which you may not be able to easily do when you are ill.

Another option to the accelerated death benefit is a viatical settlement. With a viatical settlement, you sell your life insurance policy to a third party for a lump sum greater than the policy’s cash value but less than the death benefit amount.

With a viatical settlement, once the sale of your policy is completed, you will no longer be responsible for premium payments. Keep in mind, though, that your beneficiaries will no longer receive a death benefit when you die.

Explore a viatical settlement with Lighthouse Life

If you would like to learn more about viatical settlements, contact us to find out if you may qualify. One of our trained, experienced viatical settlement experts will reach out to learn more about your unique needs and help you receive the most cash for your life insurance policy as quickly as possible.