Accelerated and Living Benefits
Traditional life insurance pays benefits only upon death. However, many modern policies include living benefits that allow access to the death benefit while the insured is still alive under certain circumstances.
Accelerated Death Benefit Riders
An accelerated death benefit (ADB) rider allows the policy owner to receive a portion of the death benefit before death if the insured meets certain qualifying conditions.
How It Works
| Feature | Description |
|---|---|
| Trigger | Qualifying medical condition |
| Benefit | Portion of death benefit (typically 25-75%) |
| Remaining benefit | Death benefit reduced by amount accelerated |
| Cost | Often included at no additional premium |
General Structure
- Insured is diagnosed with qualifying condition
- Policy owner requests accelerated benefit
- Insurer verifies condition and approves request
- Lump sum payment made to policy owner
- Death benefit reduced accordingly
Example
| Item | Amount |
|---|---|
| Original death benefit | $500,000 |
| Accelerated benefit (50%) | $250,000 |
| Remaining death benefit | $250,000 |
Terminal Illness Benefits
The most common type of accelerated benefit is the terminal illness benefit.
Qualifying Criteria
| Requirement | Typical Standard |
|---|---|
| Life expectancy | 6-24 months (varies by insurer) |
| Certification | Physician must certify prognosis |
| Documentation | Medical records required |
Benefit Details
| Feature | Terminal Illness Benefit |
|---|---|
| Benefit amount | 25-100% of death benefit |
| Payment | Lump sum |
| Effect on policy | Reduces remaining death benefit |
| Tax treatment | Generally income tax-free |
Common Uses
- Pay for medical treatment
- Cover living expenses
- Fulfill final wishes
- Provide for family while still alive
- Reduce financial stress
Chronic Illness Benefits
Chronic illness benefits allow acceleration of the death benefit if the insured cannot perform activities of daily living (ADLs) or has severe cognitive impairment.
Qualifying Criteria
| Condition | Description |
|---|---|
| ADL limitations | Cannot perform 2+ of 6 activities of daily living |
| Cognitive impairment | Severe dementia, Alzheimer's, etc. |
| Certification | Licensed health care practitioner must certify |
| Expected duration | Condition expected to last 90+ days |
The Six Activities of Daily Living (ADLs)
| ADL | Description |
|---|---|
| Bathing | Washing oneself |
| Dressing | Putting on and removing clothing |
| Eating | Feeding oneself |
| Toileting | Using the toilet |
| Transferring | Moving in/out of bed or chair |
| Continence | Controlling bladder and bowel |
Benefit Structure
| Feature | Chronic Illness Benefit |
|---|---|
| Benefit amount | Monthly or lump sum (varies by policy) |
| Duration | May be ongoing while condition persists |
| Effect on policy | Reduces death benefit |
| Tax treatment | May be tax-free if meets IRC requirements |
Critical Illness Benefits
Some policies offer critical illness benefits that pay upon diagnosis of specific serious illnesses.
Covered Conditions (Examples)
| Condition | Description |
|---|---|
| Heart attack | Myocardial infarction |
| Stroke | Cerebrovascular accident |
| Cancer | Invasive cancer diagnosis |
| Kidney failure | End-stage renal disease |
| Major organ transplant | Need for specified organ transplant |
Key Differences from Other Benefits
| Feature | Critical Illness | Terminal Illness |
|---|---|---|
| Trigger | Diagnosis of covered illness | Life expectancy of 6-24 months |
| Survival | May survive and recover | Expected to die soon |
| Purpose | Cover treatment costs | End-of-life planning |
Long-Term Care Combination Products
Hybrid or combination products combine life insurance with long-term care (LTC) benefits.
How They Work
| Scenario | Benefit |
|---|---|
| Need LTC | Use death benefit to pay for care |
| Don't need LTC | Full death benefit paid at death |
| Use partial LTC | Remaining death benefit paid at death |
Types of Combination Products
| Type | Structure |
|---|---|
| Life/LTC rider | Life insurance policy with LTC rider |
| LTC with death benefit | LTC policy with residual death benefit |
| Linked benefit | Asset-based LTC with life insurance component |
Advantages
| Advantage | Description |
|---|---|
| No "use it or lose it" | If LTC not needed, death benefit is paid |
| Easier qualification | May be easier to qualify than standalone LTC |
| Premium certainty | Premiums typically don't increase |
| Asset leverage | Single premium can fund significant benefits |
Disadvantages
| Disadvantage | Description |
|---|---|
| Higher cost | More expensive than life insurance alone |
| Reduced death benefit | If LTC used, less paid at death |
| Complexity | More complex than standalone products |
| Limited LTC benefits | May have caps or limitations |
Tax Treatment of Accelerated Benefits
Generally Tax-Free
Accelerated death benefits are generally income tax-free if:
- The insured is terminally ill (life expectancy 24 months or less)
- The benefits meet IRC Section 101(g) requirements
Per Diem Limits (Chronic Illness)
For chronic illness benefits paid on a per diem basis:
- Benefits up to the per diem limit ($420/day in 2025) are tax-free
- Amounts exceeding actual LTC costs may be taxable
Consult Tax Advisor
Tax treatment can be complex; policy owners should consult a tax advisor for specific situations.
Key Takeaways
- Accelerated death benefits allow early access to death benefits under qualifying conditions
- Terminal illness benefits pay when life expectancy is limited (often 6-24 months)
- Chronic illness benefits pay when insured cannot perform 2+ ADLs
- Critical illness benefits pay upon diagnosis of specified serious illnesses
- Combination products link life insurance with long-term care benefits
- Accelerated benefits reduce the death benefit by the amount paid
- Benefits are generally income tax-free if they meet IRS requirements
- ADLs are: bathing, dressing, eating, toileting, transferring, continence
An accelerated death benefit rider allows the policy owner to:
To qualify for chronic illness benefits, the insured typically must:
Which of the following is NOT one of the six activities of daily living (ADLs)?
Life insurance and long-term care combination products are attractive because: