Accelerated death benefits refer to death benefits of a life insurance policy that are payable prior to your death. Unfortunately, to receive accelerated death benefits, you have to be chronically or terminally ill. But, if you do qualify for these benefits, the money may be used for just about any purpose and may even be tax-free.
A terminally ill individual is defined by the IRS as someone who is diagnosed with a terminal illness by a licensed physician. The individual must be expected to die within 48 months. If an individual qualified for this, then he may receive accelerated death benefits on a tax-free basis. The money may be spent in any manner he wishes. Life insurance companies vary in how they pay terminally ill benefits. Some insurers pay a lump sum settlement while other companies pay benefits on a monthly basis according to what you want or need for the month.
An individual with a chronic illness is one who needs long-term-care services. This generally includes skilled nursing care. If an individual will be staying in a nursing home, the insurance company will pay an amount equal to the cost associated with providing the care. The IRS generally exempts this amount from taxation but may impose limits on certain types of care. For example, while the IRS won't tax accelerated death benefits that are used for nursing home care costs, the IRS limits the exclusion to $290 per day.
The benefit of accelerated death benefits in a life insurance policy is that you are able to access your death benefit prior to your death. Even though the situation you are in may be depressing and stressful, you do get the benefit of having money that you otherwise would not have so that you can enjoy the last remaining years of your life or pay for the long-term care that you need.
Even though accelerated death benefits provide money to you in extreme cases, these benefits should not be considered a total replacement for basic health insurance and long-term care. Your insurance policy may accelerate most of the policy's death benefit, but it is sometimes up to the discretion of the insurance company. In some cases, the insurer will only accelerate up to 50 percent of the death benefit; in other cases, the insurer will accelerate up to 100 percent of the death benefit.