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Accelerated Death Benefit in Life Insurance

Amy Danise

An accelerated death benefit lets you receive some or all of your life insurance policy’s death benefit money before death if you’re terminally ill or diagnosed with an “eligible illness.” It’s sometimes called living benefits. It can provide money for medical expenses and end-of-life care.

Typically a death benefit is paid out only when a person with life insurance dies, and that payout goes to the beneficiary named on the policy. With an accelerated death benefit, some or most of the death benefit money can be paid early to the insured person. If that happens, the life insurance beneficiary listed on the policy will receive whatever is left of the death benefit after the insured person dies.

What illnesses qualify for an accelerated death benefit?

If your life insurance policy has an accelerated death benefit feature, it will outline the “eligible” illnesses that will allow you to receive the death benefit early.

Some insurers offer it only with a terminal illness. Others provide it depending on the severity of the illness. The percentage of the death benefit available can vary by type of illness. Eligible illnesses typically fall into three groups:

  • Terminal illness: A condition likely to result in death within 12 months of a diagnosis.
  • Critical illness: A life-threatening condition such as cancer, stroke, a heart attack, advanced Alzhemer’s, major organ failure, end stage renal failure or ALS.
  • Chronic illness: May be defined as a cognitive impairment or the inability to do at least two of the six “activities of daily living” (ADLs) for a certain time period, such as 90 days. The ADLs are often defined as: eating, bathing, getting dressed, toileting, transferring (for example, from a bed to a chair) and continence.

An accelerated death benefit is generally 25% to 95% of the death benefit amount, according to the American Council of Life Insurers, a trade group. Also look at the policy for how the money would be paid out -- for example, monthly or in a lump sum.

Is an accelerated death benefit taxable?

An accelerated death benefit is not taxable if it’s received by an insured person who is terminally ill. If the individual is chronically ill, an accelerated death benefit is not taxable but only up to a certain amount. See the IRS rules for taxes on life insurance proceeds.

How to get an accelerated death benefit

Accelerated death benefit riders are often included on life insurance at no extra charge. If not, you can typically add it for a small charge.

The rider is generally available on many policy types, including term life insurance, universal life insurance and whole life insurance.

If you recover from the illness, you do not need to pay the money back.