What Is an Accelerated Death Benefit in Life Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

What Is an Accelerated Death Benefit?

An accelerated death benefit (ADB) is a benefit that lets you get part of your life insurance policy’s death benefit while still alive if you’re diagnosed with a terminal or chronic illness.

Typically, people opting for an ADB have less than a year to live and use the funds for medical treatments and essential expenses.

Key Takeaways

  • An ADB is a life insurance policy provision that lets a terminally or chronically ill person get part of their death benefit while still alive.
  • ADBs aren’t usually taxable as income.
  • If you get an ADB, your beneficiaries will get a lower death benefit.
  • To get an ADB, you must prove to your insurance company that you’re either terminally ill or can’t perform two more activities of daily living.
  • viatical settlement may get you a higher payout.

How Accelerated Death Benefits Work

Accelerated death benefits let the policyholder cover daily living and medical expenses, while still leaving part of their death benefit for their family. ADBs were introduced in the late 1980s primarily for AIDS patients and help reduce financial stress for people with terminal illnesses.

An accelerated death benefit rider, also known as a living benefit rider or terminal illness rider, can be included in your life insurance policy. Some policies may offer ADBs even if not explicitly stated in the contract.

After your ADB rider is activated, you can access 25% to over 50% of your death benefit, based on your insurer and policy. You can use these funds for various purposes, like hiring an at-home nurse or covering travel costs. 

Any amount you don’t use will go to your beneficiaries after your death, but you have to keep paying premiums after receiving the ADB for that to happen.

Who Can Use the Accelerated Death Benefit Provision?

You can use your accelerated benefit rider if diagnosed with a terminal illness and your life expectancy is less than two years. You’re also eligible if you: 

  • Have an illness that shortens your lifespan.
  • Need an organ transplant.
  • Require long-term hospice care.
  • Need help with two or more “activities of daily living” like bathing or using the toilet.

How Much Does an Accelerated Death Benefit Cost?

Accelerated death benefits are often included in life insurance policies, so you don’t pay extra. 

The cost of accelerated death benefits varies by insurance company and policy. If the ADB is included in the policy, its cost is already covered. Otherwise, you may need to pay an additional fee or a percentage of the death benefit for this coverage.

What Types of Life Insurance Policies Can I Add an ADB to?

Originally, you could add an ADB to any type of life insurance that accumulates cash value, like a whole life insurance or universal life insurance policy. Now, you can get term life insurance with accelerated death benefits, too.

Does the Insurance Company Charge You When You Get an Accelerated Death Benefit?

Yes, the insurance company charges you when you get an accelerated death benefit, usually an administrative fee it deducts from the amount you receive. 

How Are Death Benefits Paid for?

Life insurance companies pay for death benefits by charging an administrative fee that they deduct from the ADB payout. In other words, an ADB rider is usually included for free in a life insurance policy — you only get charged if you actually use it.

Are Accelerated Death Benefits Taxed?

No, accelerated death benefits are not taxed. They may, however, affect your Medicaid or other government benefits.

Example of Accelerated Death Benefits

Michelle, a 45-year-old woman with a $1 million life insurance policy, is diagnosed with advanced pancreatic cancer, reducing her life expectancy to one year. Her policy includes an accelerated benefit rider, allowing her to access part of her death benefit early. 

The insurance company “acclerates” half of her policy ($500,000) and offers her a 40% ADB on that $500,000. The other 60% of that $500,000 is the insurance company’s administrative fee. This means Michelle gets an ADB of $200,000 while still leaving a $500,000 death benefit to her beneficiaries. 

For the policy to stay active and her beneficiaries to receive the death benefit, Michelle must keep paying premiums. But the premiums will cost less than before because Michelle will be paying for a $500,000 policy now instead of a $1 million policy. 

What Is the Purpose of an Accelerated Death Benefit?

The purpose of an accelerated death benefit is to help terminally or chronically ill people access part of their life insurance’s death benefit before they die. This can help them pay for medical and living expenses. In exchange, the death benefit for their beneficiaries is reduced.

Accelerated Death Benefit vs Long Term Care

An accelerated death benefit (ADB) and a long-term care (LTC) rider can both be used for long-term care when the insured can’t perform two or more activities of daily living. An ADB is usually included in a policy for free, while an LTC is a paid add-on. 

An ADB may not be large enough to cover all long-term care expenses, especially if the person lives for many years, so an LTC provides additional coverage.

Accelerated Death Payouts vs. Policy Loans

If your policy has cash value, you can take out a loan against it without needing a qualifying illness. This option differs from an accelerated death benefit payout, which requires a terminal or chronic illness diagnosis. 

If you die with an outstanding loan against your cash value, this will reduce your beneficiaries’ payout, but you can repay the loan while you’re still alive. You can’t repay an accelerated death benefit. 

ADBs are tax-free. So are policy loans against cash value, as long as you pay the loan back. But if your life insurance policy terminates before you pay back the loan, you must pay taxes on it.

Viatical Settlement vs Accelerated Death Benefit

A viatical settlement is when a terminally ill person sells their life insurance policy to a third party in exchange for a cash payout. A viatical settlement may get you a higher payout because you can have buyers bid against each other for your policy. With your insurance company, you have less, if any, negotiating power to get a higher ADB.

What Are the Disadvantages of Accelerated Death Benefits?

The main disadvantage of accelerated death benefits is that they lower the death benefit for your beneficiaries after you die.

Additionally, receiving an ADB may affect your Medicaid or other government benefits.

FAQs About Accelerated Death Benefits

What Is an Accelerated Death Benefit Rider?

An accelerated death benefit rider (ADB rider) is a life insurance provision that lets you get some of your policy’s death benefit before you die if you’re diagnosed with a terminal or chronic illness.

How Do You Qualify for Accelerated Death Benefit?

You qualify for an accelerated death benefit if your life expectancy is under two years, you need help with daily living, you need an organ transplant, or you require long-term hospice care.

Why Would an Accelerated Death Benefit Be Denied?

An accelerated death benefit might be denied if the insurance company’s independent physician evaluates your medical records and determines your life expectancy is longer than two years. In that case, you may need to get a lawyer.

Does Life Insurance Pay Out for Terminal Illness?

Yes, life insurance pays out for terminal illness by paying you part of your death benefit while you’re still alive. This is called an accelerated death benefit.

What Is the Life Expectancy for Accelerated Death Benefit?

The life expectancy for an accelerated death benefit is two years or less, sometimes 12 months or less. (It depends on the insurance company.)

How Much of the Face Value of a Policy Can Be Collected Early, and How Is It Paid?

You can collect 25% to over 50% of the face value, and it’s paid in either a lump sum or monthly installments.

How Are Accelerated Benefit Plans Regulated?

State insurance departments regulate accelerated benefits. The National Association of Insurance Commissioners (NAIC) has created model regulations for these benefits, which outline qualifying conditions for payment and cap the charges insurers can deduct from ADB payouts.

What Do ADB Riders Cost on a Life Insurance Policy?

ADB riders are usually included free in your life insurance policy and only cost money if you use the rider.

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