Life insurance policies offer death benefits to your heirs when you die. This money may be used for any purpose. However, you may need this money before you die if you suffer from a chronic or critical illness. For this reason, life insurance companies offer life insurance policies with living benefits called "accelerated death benefits."
An accelerated death benefit rider lets you spend down your death benefit prior to death. You must contact the insurance company and request an accelerated death benefit form. The insurance company determines the rules for the accelerated benefit. Some of these rules are spelled out in your contract, and some may be left to the discretion of the insurer. Generally, you must have been diagnosed with a terminal illness, or an illness in which you are not expected to live for more than 48 months, in order to qualify for benefits.
The benefit of an accelerated benefit rider is that you get the money you need or want for expenses you have now, while you're alive. The death benefit may be the only source of significant savings you have. This money is also generally tax-free, since the IRS recognizes this as a non-taxable event. The IRS does require that you be diagnosed by a licensed physician as terminal, meaning you are not expected to live for more than 48 months.
The disadvantage of an accelerated death benefit rider is that there is no guarantee that the rider will give you what you want in some instances. A life insurance company may restrict benefits to one-half of the death benefit. Additionally, the insurer may not give you a lump sum amount. Instead, they may require you to take monthly payments, which may not be enough money to meet your needs or wants.
Contact your insurance company if you are unsure how your accelerated benefits rider works. Otherwise, when you shop for life insurance, be sure that you are getting the most favorable terms. Some life insurance companies do not place many restrictions on the use of an accelerated benefits rider. It's likely you'll want maximum flexibility in your insurance policy if you ever have to use that rider.
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007