When applying for a life insurance policy and considering all of the riders available from the insurance company, many people choose to add the Accelerated Death Benefit (ADB) rider. This rider allows a policyholder to receive a portion of the death benefit specified in the policy while they are still alive.
When faced with a terminal illness, they may opt to use this rider instead of participating in a life or viatical settlement, in which they sell their life insurance policy to a third party for a lump sum. Policyholders should be cautious of life settlement brokers and companies who buy life insurance policies directly if they don’t make policyholders aware of this rider, as was the case with Ted Muller.
When exploring life insurance policy options for clients, Windsor has discovered, on far too many occasions, that policyholders have not been informed their “accelerated death benefit”. In these instances, Windsor diligently upholds our ethical standards by ensuring that policyholders are not ignorant of this particular benefit, which we believe can be instrumental in reducing the stress that surrounds end of life finances and decision making. The article below is a continuation of that ethical standard.
Chances are good that you took your time when purchasing life insurance and asked a lot of questions about the policy, benefits, and strength and weaknesses before purchasing the policy. While many insurance companies offer full disclosure about the specifics of your policy, there are many more that leave out information about one key element that is either part of the policy itself or available as a rider to the insurance policy. That element is often referred to as the accelerated death benefit.
It’s an important provision to consider when buying life insurance as it can protect your financial interests, and those of your family, before your death. That is if your death is the result of specific terminal illnesses or other specific sets of circumstances outlined in the policy (medically incapacitating conditions the necessity of long-term care, for instance). It works by paying a portion of the death benefits to the policyholder. Upon the death of the policyholder, the death benefit pays out to the beneficiary.
Qualifying for the ADB is stated in the actual life insurance policy itself. It can vary from insurer to insurer, and there is often more than one way to qualify for the early payment of the death benefit. They are:
Not all insurers offer payment for all of these qualifying events, but if offered they will be detailed in the insurance policy itself.
The accelerated death benefit is a rider that accelerates a portion of the death benefit in the event of a terminal illness or other qualifying conditions. It is considered a more recent insurance development, and many older policies do not have the ADB.
More recently, ADB’s have become a standard rider, and some life insurance companies have honored them even though they were not explicitly mentioned in the life insurance contract language.
In the event of being diagnoses as having a terminal illness, the policyholder should review the life insurance policy in their possession, as well as contact their insurance company to discuss whether or not they are eligible for early payment of a portion of their death benefit.
The percentage of the face amount of the policy that is advanced can be anywhere from 25%-95%. There is sometimes a limit as to the amount of money that will be advanced, and that ranges from $250,000 up to $1 million.
The policyholder may not receive a payment that is equal to the eligible death benefit specified in the policy. For example, though a policyholder qualifies for $250,000 because of a terminal illness, they may only receive $200,000, because the insurance company discounts the amount to be paid in consideration of losing the time value of money.
Even though the insurer discounts the payment and only pays $200,000, the amount of $250,000 is deducted from the face amount of the policy, and the difference is what would be paid to the beneficiary. After the ADB has been paid, the premium payments will be adjusted to match the new face amount of the policy.
In the case of the payment of accelerated death benefits, the lump sum payment receives the same tax treatment as the death benefit being paid to the beneficiary, which is tax-free treatment. Individuals should consult a qualified tax professional for information and advice on their personal situation.
The Health Insurance Portability and Accountability Act of 1996 provided for the payment of accelerated death benefits to people with a prognosis of 24 or fewer months from a board certified physician to be treated as traditional death benefits, which are tax-free on the federal level. However, some states may tax the income from these benefits and failing to obtain the proper documentation could result in federal taxation too.
Viatical settlements are similar to accelerated death benefit riders in several ways.
First, a lump sum payment is made to the policy owner. This amount is greater than the surrender value of the policy and less than the full face amount. It is generally an amount higher than what is paid from an ADB rider.
Secondly, it is eligible because of a terminal illness diagnosis. In the case of viaticals, someone diagnosed as having less than 24 months to live qualifies.
It isn’t an included part of every life insurance policy. In fact, these specific benefits must often be purchased as a rider to your existing life insurance policy. Adding the rider may raise your insurance premiums if it isn’t already included in your life insurance coverage.
However, adding it as a rider doesn’t necessarily raise your premiums. Some carriers will add it, upon request, at no additional charge. Other carriers will add the rider at no cost other than a fee if or when a claim is made.
The time to make sure you have this valuable type of insurance protection is while you and all other individuals you seek to cover are healthy. Some policies will not cover people who already have terminal illnesses at the time of purchase. Other policies will specifically exclude people with family histories of certain illnesses or conditions.
If you do have a family history of lingering illnesses or certain terminal cancers, though, it is wise to consider investing in an accelerated death benefit rider. Make sure you take the time to discuss your options with a qualified and trusted insurance agent.
Accelerated death benefits range in amount from 25 percent of the face value of the policy to 100 percent of the benefit minus any loans received against the value of your policy. Payments may be received in one single payment or in smaller monthly payments. Some policies specify the way payments are made while others allow the policyholder to make the determination.
The amount received as an accelerated death benefit will be deducted from the face value of the policy and then distributed to your beneficiaries. If you’ve exhausted the full value of your policy, then your beneficiaries will not receive payment after your death.
While it’s never a bad idea to have the ability to tap into resources such as accelerated death benefits, there are a few things you should consider before making use of them, including the following.
Accelerated death benefits are, in no way, meant to replace the need for quality health insurance. They are simply meant to provide peace of mind and mitigate some of the expenses of end of life care and treatment. It is wise to invest in quality health insurance and long-term care insurance and only use accelerated death benefits as a last resort – once these resources are depleted.
The federal government does not require you to collect accelerated death benefits or viatical settlements before receiving Medicaid. However, some states are beginning to pass laws to that effect. If you choose (or are forced) to use accelerated death benefits or sell your insurance policy, the proceeds from the events may affect your eligibility to receive Medicaid.
You purchase life insurance in order to protect your family in the event that you are no longer able to do so yourself. It’s a gift you give to them in order to guarantee that your children will have the ability to attend college, that your spouse will have time to grieve before returning to work, and so that your family won’t have to worry about paying for a home or other necessities in life.
An accelerated death benefit may be for a portion or the complete amount of the death benefits of the policy. A viatical settlement is a settlement for a percentage of the policy’s face value. Other differences between the two include the fact that the accidental death benefit is paid to you by the insurance company and a viatical settlement is arranged through a third party – the viatical settlement company. With the viatical settlement, the company purchases your policy. They receive ownership of the policy and are responsible for all future payments. Upon your death, they receive the death benefits in full. With the accelerated death benefit, if you did not receive 100 percent of the death benefits of the policy, whatever remains will go to your beneficiaries.
In general, there are no restrictions on how these funds can be used. Some people choose to use them to pay medical bills, to fund experimental treatments, or to purchase expensive medications. Others choose to use this money to get their financial affairs in order (pay off mortgages, make financial arrangements for family members, etc.). It is even possible, in most cases, to use these funds to make a few final memories with family vacations. Check with your carrier to learn if there are any specific restrictions on how the funds are used.
Once you’ve filed for, and received an accelerated death benefit payment, you do not have to repay the money if your health improves. That being said, filing a claim under false pretenses or with fraudulent information can result in both criminal and civil penalties.
Specific requirements vary from company to company and policy to policy. You’ll need to know the specifics of your policy in order to determine if your health condition qualifies for receiving accelerated death benefits. In most cases, a diagnosis with a terminal illness with a life-expectancy of 24 months or less is adequate though some policies may limit acceptance to specific health conditions or illnesses.
Once you determine that accelerated death benefit coverage is the right choice for you, it’s important to work with a name you can trust to get the coverage you need. Ask questions about the specifics and make sure you know what kind of policy you’re getting, whether you need a rider for the accidental death benefits, and specific information on the maximum benefit available to you and how the funds are paid out if or when they are requested (lump sum, monthly, etc.). The more you know now the better prepared you are if you ever need to make use of these benefits.