Are you thinking of adding life insurance to your financial plan? It’s an important step to take when you want to help financially protect loved ones in case the worst happens to you. The sooner you buy life insurance, the more affordable your coverage is likely to be.
While purchasing a quality term life insurance policy is easy and simple these days thanks to online buying options, there are some details that you should know about so that you don’t overlook them when it’s time to choose a policy. Policy riders are typically the perfect example of little extras that can throw a wrinkle into your insurance-buying plans.
Life insurance riders are additional features that can be added to a life insurance policy to make it more personalized to meet your individual needs. Sometimes these add-ons are built into the policy, and other times they are available at an additional cost to the policy owner.
A common type of rider that you’ll encounter when researching life insurance is the accelerated death benefit. This rider is available for most life insurance policies and your insurance company may encourage you to purchase it when you buy coverage. In some cases, your insurance policy may include this rider automatically, at no additional charge.
Whether you already have life insurance or you’re planning to buy a policy, here are five things to know about how this life insurance benefit works and why you may need it.
What is a life insurance accelerated death benefit rider?
An accelerated death benefit rider creates a provision in your life insurance policy that allows you (the insured) to receive a portion of the life insurance death benefit while you’re still living if you become terminally ill — usually with a documented life expectancy of two years or less. The amount you’re eligible to receive is typically limited to a percentage of the policy’s death benefit amount, and the limit can vary from one insurer to another insurer.
Essentially, including this type of rider in your coverage is a little like having an insurance policy for your insurance policy. End-of-life care can be costly and while Medicaid covers those costs if you’re income-eligible, Medicare does not. You could purchase a separate policy to cover the cost of care, but it’s likely to come with substantial premiums. On the other hand, if you were to develop a chronic illness and require high-level care, your accelerated death benefit rider could help with those costs, allowing your loved ones to preserve your financial assets for other expenses.
An accelerated benefit rider essentially allows you to balance the financial needs associated with treatment and other care if you become terminally ill. At the same time, your family members still have the reassurance of receiving a death benefit payment in the future to assist with funeral and burial costs or other expenses. For that reason, it’s often referred to as a living benefit rider.
How the accelerated death benefit rider works
Many people who are terminally ill want to do everything they can to make their passing easier on their loved ones, which is when an accelerated death benefit rider can become extremely helpful.
Having a living benefit rider in place isn’t necessarily about a payout for you, but it does allow you to access some of the death benefit proceeds so you can get your affairs in order. For example, Haven Term policyholders can access 75 percent of their death benefit or up to $250,000, whichever comes first. As a result of using this rider, the monthly (or yearly) premium payment would decrease to reflect the new face amount.
Having access to the life insurance proceeds ahead of time can enable a policyholder to settle affairs and make arrangements, so the family doesn’t have to. Again, the amount of the benefit that you can use and when it can be used will depend on the specific accelerated death benefit rider you have.
Keep in mind that this money comes directly from the policy’s death benefit. If you were to use a certain amount of your life insurance policy’s death benefit, the amount your beneficiary or beneficiaries receive when you pass would be lowered by the amount you received earlier. That’s not necessarily a bad thing. Being able to pay your own medical or other expenses before passing away from a terminal illness could make it easier on your surviving family members as they’ll have less to deal with, financially speaking.
It is, however, something to consider carefully if you’re contemplating a life insurance policy with an accelerated death benefit rider attached. Living benefits can offer convenience and a measure of comfort in the midst of dealing with a critical illness, but not without impacting your life insurance coverage.
Does this rider cost extra?
The good news about the accelerated death benefit rider is that most insurers provide it as a feature that’s included as part of the life insurance policy you’re buying. If that’s the case, you will not need to pay a higher premium per month to have this rider. Where you may incur fees is in using the rider should you ever need to.
If your life insurance company offers an accelerated death benefit rider, living benefit rider or terminal illness benefit rider (these terms may be used interchangeably) at the time you purchase your policy, be sure to ask whether adding the rider will raise your insurance premiums. Including an accelerated benefit provision could give you peace of mind, but you should be aware of what that means for you cost-wise.
Who qualifies for an accelerated death benefit rider?
Every life insurance company may handle things differently when it comes to deciding who qualifies for an accelerated death benefit provision. Typically, however, the most important factor that influences the decision is the insured person’s life expectancy.
Life insurance companies generally offer accelerated death benefits to individuals who have a life expectancy of two years or less. Coverage may be extended to people who have a longer life expectancy if they’re terminally ill or have been diagnosed with a critical illness or terminal medical condition. It may also be possible to purchase life insurance with an accelerated death benefit rider if you have a chronic illness that prevents you from carrying out normal daily activities.
Qualification may be automatic if you’ve undergone or are scheduled to undergo an organ transplant, require long-term care in an assisted living facility or need in-home medical care for help with things like bathing, dressing and eating. People with advanced Alzheimer’s Disease or severe cognitive impairment, for example, may fall into this category.
Please note: If you have made your beneficiary irrevocable, that person’s signed consent will be required before an accelerated death benefit payment can be made. (The Haven Term beneficiary designation is revocable unless you tell us otherwise, either at issue or later.)
Drawbacks to living benefit riders
The potential pitfalls associated with an accelerated benefit rider aren’t necessarily deal-breakers (especially if this rider is included for free as part of your life insurance policy), but it’s important to understand the fine print about accessing a death benefit early.
The most obvious drawback is that tapping into a life insurance death benefit means less money will be left to your beneficiaries. Your life insurance proceeds might be more valuable to your partner or children if they can be used to cover day-to-day expenses or help meet long-term financial goals. For example, you may still owe several hundred thousand dollars on a mortgage or you may want to ensure that your spouse has sufficient assets to put your children through college when the time comes.
Also, most life insurers charge an administrative fee for accessing the death benefit in advance. This is important to know because the fee will be deducted from any amount you are approved to receive. Before triggering an accelerated death benefit feature or paying extra to add it to your policy, find out about fees. They vary from one insurance carrier to another.
Another potential issue? Taxation.
A 1099 LTC will be generated as a result of payment received from the accelerated death benefit. Often, these payments are income tax-free. But there are exceptions. For example, some people who hold financial assets outside the U.S. may be responsible for FATCA reporting. Since the reporting threshold is $50,000 in aggregate value, an accelerated death benefit rider payout could trigger a reporting requirement. It’s always best to discuss with a tax advisor. The last thing you or your family needs to deal with in a terminal illness situation is an unexpected tax bill.
Something else to consider is how receiving a living benefit associated with a chronic or critical illness may affect your ability to receive Medicaid or Social Security disability payments if you need either of those. You’d want to talk with both your insurer and your Medicaid caseworker to determine whether your benefits might be impacted by receiving an accelerated death benefit.
Do you need an accelerated death benefit rider?
Now that you’re well-versed on the ins and outs of the accelerated death benefit rider, you may be down to your last question: “Do I really need this rider included in my life insurance policy?”
Considering that many companies offer the accelerated death benefit rider as a free feature of their policies, the answer is sure, why not?
Despite its limitations, this rider does provide you with more options if you were to become terminally ill. The ability to get your affairs in order and to relieve some stress on your loved ones is a powerful thing and may be worth any drawbacks.
Ultimately, if the rider is offered as an inherent feature of your policy (like with the Haven Term policy), it’s a good thing to have because it provides you with more flexibility at no additional cost. If it’s not an included feature, you should consider whether the limitations and fees outweigh the benefits.
Keep in mind that an accelerated death benefit rider is just one way to access the benefits in your life insurance policy. If you have a permanent life insurance policy or a term life insurance policy that can be converted to permanent, a viatical settlement is another option. With a viatical settlement, a terminally ill or chronically ill policy owner can sell their policy to a settlement company or broker in return for a lump sum payment. The policy purchaser would continue paying the premiums and receive the death benefit when the original policy owner passes away.
This type of arrangement could make sense as an alternative to an accelerated benefit provision if a lump sum payment would help pay expenses at the end of life and your beneficiary doesn’t necessarily need the death benefit. Or, you may consider a viatical arrangement if you can’t afford the premiums any longer.
Regardless of which option you decide to pursue, talk over the financial implications with your loved ones and get a second opinion on the tax rules from your personal tax advisor. The best decision you can make regarding accelerated death benefits or any other provision relating to your life insurance coverage is an informed one.
Rebecca Lake is a freelance writer specializing in personal finance and small business. She lives on the North Carolina coast with her two children.