Traditional life insurance policies help provide financial security for beneficiaries. They can also assist in estate planning, such as making charitable gifts or reducing estate taxes. However, these policies historically required the insured to pass away before the death benefit could be paid out. This changed with the introduction of accelerated death benefits (ADBs).
ADBs are riders that allow insured individuals to access a portion of their life insurance policy’s death benefit while still alive, under specific conditions. These riders represent a significant innovation in the life insurance industry. By providing living benefits, they offer much-needed financial assistance during challenging times.
There are several types of ADB riders, each triggered by different medical conditions. Some are included in the original life insurance contract, while others can be added for an additional cost. ADBs can provide access to a portion or the entire death benefit.
One common type of ADB rider is the long-term care (LTC) rider. This rider helps pay for various personal care and medical expenses not covered by health insurance. Such expenses include managed care, home health care, adult day care, assisted living facilities, and nursing home care. To qualify, the insured might need a medical exam and must meet specific health criteria.
Another ADB rider is the disability rider, which compensates for the loss of earned income due to disability. The definition of disability and the benefits provided can vary between policies. Some riders may offer different levels of benefits depending on whether the disability is total and permanent or partial and temporary.
A critical illness rider pays out a lump sum if the insured is diagnosed with a serious illness, such as cancer or a heart attack. This payment helps cover substantial medical expenses. Major organ transplants also qualify for critical illness benefits.
The chronic illness rider is another ADB that provides benefits when the insured becomes unable to function normally. Conditions like Alzheimer’s or severe cognitive impairment can activate this rider. The benefits are often similar to those provided under LTC riders, covering various long-term care services.
For those diagnosed with a terminal illness, a terminal illness rider can pay out part of the death benefit upfront. This money is typically used to improve the insured’s comfort and quality of life during their remaining time.
Each ADB is triggered by specific conditions. For instance, LTC and chronic illness riders activate when the insured cannot perform at least two out of six activities of daily living (ADLs) without assistance. These activities include eating, bathing, toileting, continence, personal grooming, and transferring between a wheelchair and a bed. A doctor must certify the insured’s inability to perform these activities for benefits to be paid.
Disability riders are triggered when the insured is certified by a doctor as being physically or mentally incapable of performing their normal job duties. The payout from these riders can be a lump sum or monthly benefit, depending on the rider and carrier’s terms.
Different insurance providers have varying rules on what conditions trigger certain benefits. The insured’s life can improve significantly if they qualify for these benefits. The specific rules can vary widely by state, especially in places like New York.
The underwriting requirements for ADB riders can be strict, similar to standalone insurance policies. Some riders require comprehensive medical exams and tests, while others use simplified underwriting that involves answering health-related questions. Before purchasing a policy with ADBs, it’s essential to understand these requirements.
ADBs impact the remaining death benefit of a policy. For example, a policy with a $200,000 death benefit might allow the insured to access up to $80,000 if they become disabled. In some cases, the insured can take the entire death benefit while still alive. This will reduce the amount the beneficiaries receive, which is crucial to communicate to loved ones.
All benefits received from ADB riders are tax-free. This tax treatment aligns with the death benefit, which is also tax-free for beneficiaries. Since ADB payments are part of the death benefit, they inherit the same tax-free status.
Comparing ADBs with other methods of accessing life insurance policy cash shows that ADBs are advantageous. They provide more substantial payouts than the policy’s cash value. Unlike cash withdrawals, which often incur surrender charges and fees, ADB payouts are not subject to such deductions.
If an insurance policy lacks ADB riders, selling it through a life settlement can be an alternative. This transaction involves selling the policy to a third party for a lump sum cash payment, usually more than the policy’s cash value. This option is especially relevant for policyholders aged 60-65 with a policy face value of at least $50,000. The payout can help cover expenses without stringent medical underwriting requirements.
In conclusion, we focus on providing financial solutions that adapt to your changing needs. We offer services that allow policyholders to access their life insurance policy’s value through various options, ensuring you have the flexibility and funds when you need them most. Contact us to explore how we can assist you.
