Accelerated Benefit Riders … What are they?

Accelerated Benefit Riders … What are they?Accelerated Benefit Riders are additional protections that can be added to a permanent life insurance contract.  They are also commonly referred to as Living Benefit Riders.  Many of the largest carriers in the country are affording insureds the ability to receive benefits from their traditional whole or universal life insurance policies before death.  We all know people are living longer and many of us are very concerned with the ever increasing financial hardship associated with an end-of-life illness.  These include, but are not limited to, chronic care, critical illness & terminal illness just to name a few.  Another issue seems to be access to these stand-alone life and health benefits because they are either too expensive or unavailable in the individual market.  These accelerated benefit riders allow the insured to essentially customize their life insurance policy by adding additional coverages that suit their needs.  Some riders are automatically included in the policy, while others have to be requested.  Most of these riders come at no additional premium but each has their own purpose.  Not all riders are available with all policies and they vary from carrier to carrier.  Let’s review some of the most common Accelerated Benefit Riders:

  • Chronic Care Rider – In the event long-term care is needed because the insured cannot perform a number of Activities of Daily Living (ADL’s) such as transferring, toileting, continence, bathing, dressing, or eating, the advanced benefit is usually paid as a set percentage of the death benefit up to a maximum monthly benefit of $50,000[1]. With chronic care, the condition must likely be permanent.
  • Critical Illness Rider – In the event the insured is diagnosed with one of several specified critical illnesses (heart attack, stroke, cancer, etc.) the advanced benefit is paid as a lump sum based upon a set percentage, usually 50-80% of the death benefit. The insured can use the critical illness benefits to pay for anything he chooses—the proceeds are paid directly to the insured and there are no spending limits. Therefore, a client can use the insurance proceeds to pay for basic living expenses that are not directly related to the medical care he receives, or for medical care not covered by health insurance.
  • Terminal Illness Rider – In the event that the insured is diagnosed as terminally ill, the advanced benefit is usually paid as a lump sum based upon a set percentage, usually 50% of the death benefit, up to a lifetime maximum of $1MM2.  This coverage is also available on most term life policies commonly known as an Accelerated Death Benefit Rider.

In general, accelerated benefits can range from 25 to 100 percent of the death benefit. The payment depends on your policy’s face value, the terms of your contract, and the state where you reside.  The cost may be included in your insurance premium or added to the policy for a small amount, usually a percentage of the base premium. Some companies only charge you for the option if you use it.  Payments of accelerated benefits will reduce the cash value and death benefit otherwise payable under the policy.

Always ask your insurer to provide you with a quote before you exercise your accelerated death benefit claim.  In most cases, accelerated benefits are not subject to federal income taxes. Under the federal tax code, a terminally ill person (defined as a person having only 12 months to live) would not have to pay taxes on accelerated benefits. A chronically ill person is usually exempt but may have to qualify for the exemption by being certified each year.  Under U.S. Department of Health and Human Services policy, you cannot be forced to collect accelerated benefits from your life insurance policy before qualifying for Medicaid. But if you choose to receive accelerated benefits, that money could be considered income, which might affect your Medicaid eligibility.  To ensure compliance with current tax laws, check with your local tax advisor.