Considering life insurance? If you’re like most financially savvy adults, you know that buying coverage is an important step to help financially protect your loved ones.
While buying a quality term life insurance policy is simple, there can be some details in the process that aren’t so clear. Policy riders are typically the perfect example of little extras that can make a policy a little overcomplicated.
Life insurance riders are additional features that can be added to a life insurance policy, so it’s more personalized to your individual needs. Sometimes these are inherent benefits to the policy you are buying, and, other times, they cost extra to add on.
A common type of rider that you’ll encounter when researching life insurance is called “accelerated death benefit.” This rider is available for most life insurance policies. Often, your policy may include this rider, and you don’t even know about it. Whether you already have life insurance or if you’re researching buying a policy, it’s important to understand how this benefit work.
#1: 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 to receive a portion of the life insurance death benefit if you were to become terminally ill — usually with a life expectancy of two years or less.
#2: How the accelerated death benefit rider works
Many people who are faced with a terminal illness want to do everything they can to make their passing easier on their loved ones, which is when this rider can be helpful.
This rider isn’t necessarily about making the policy 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 are able to access 75% 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.
By having access to the life insurance proceeds ahead of time, it enables a policyholder to settle their affairs and make arrangements, so their family doesn’t have to. The amount of the benefit that you can use 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, that means only the remaining percentage of the original benefit will pay out to your loved ones named to the policy after you pass away. That’s not necessarily a bad thing. Again, being able to pay your own expenses, medical or otherwise, before you passing makes it easier on your surviving family members as they’ll have less to deal with, financially speaking.
#3: 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 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 it.
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There are some potential pitfalls with this rider that you need to understand. These drawbacks aren’t deal-breakers (especially if this rider is included as part of the policy), but it’s important to understand the fine print of accessing a death benefit early.
The most apparent drawback is that tapping into a life insurance death benefit means less money is left to your beneficiaries. Your partner or children may have different day-to-day expenses that the proceeds of a policy would be more valuable to help cover.
Additionally, most life insurers charge an administrative fee for accessing the death benefit in advance. This is important to know because if you are requesting a certain amount (say $100,000), if approved, the amount paid will be less due to this fee. Before utilizing an accelerated death benefit feature or paying extra to add it to your policy, it’s important to review and understand the fine print as the rider can vary between carriers.
Another potential issue? Taxation. A 1099 LTC would be generated as a result of payment received from the accelerated death benefit. Often, these payments are income tax-free. However, it’s always best to discuss with a tax advisor as there could be tax consequences.
#5: Do you need it?
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 feature to 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. That said, using this benefit does come with strings attached. 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 and provides you with more flexibility if you were to become terminally ill. If it’s not an included feature, you should consider the limitations of this rider and if the fees associated with it outweigh the benefits of having it.
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While we hope this information is useful, it’s intended as general education only. Haven Life doesn’t provide tax or legal advice, so we encourage you to seek advice from your own tax or legal professionals.