If you’re in the market for a life insurance policy, you may be asked if you’re interested in including an accelerated death benefit. Sometimes you’ll hear an accelerated death benefit referred to as a living benefit rider or an accelerated living benefits rider.
And you may understandably have no idea what to say. It isn’t a term anyone hears often, unless they work in the insurance industry. For those who aren’t acquainted with the phrase, an accelerated death benefit is a rider, something you can add onto a life insurance policy, usually a permanent life insurance policy, as opposed to term.
Should you get it? As with many features in an insurance policy, it has its pros and cons, all of which you’ll want to weigh before you part with your hard-earned money.
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What Is an Accelerated Death Benefit?
It’s a benefit that you hopefully won’t need to use. The money is available only to individuals who are terminally or chronically ill, depending on the structure of your life insurance policy. But typically, an accelerated death benefit is associated with an incurable disease or condition.
Here’s how it generally works: If you are diagnosed with a terminal illness, and you have an accelerated death benefit on your life insurance policy and physicians expected you to die within a certain amount of time — usually six months to a year — you’d be able to access the money from the policy’s death benefit while you’re still alive.
Unfortunately, end-of-life treatment and care are usually costly. The funds from an accelerated death benefit can be used to cover health care costs.
In 2024, routine home care costs ranged from $172.35 to $218.33 per day, depending on the duration of care, according to the National Hospice and Palliative Care Organization. For patients receiving continuous home care, costs can easily climb to $1,565.46 a day.
Granted, many people don’t pay those prices. Insurance, whether it’s a conventional health care plan or Medicare, will generally cover a lot of costs. But especially if you’re younger and have underperforming health insurance, or if you’re simply in the hospital a lot and taking on a lot of expenses, you may find that dying is far more expensive than you bargained for — and that’s where an accelerated death benefit could come in handy.
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What Are the Advantages of Accelerated Death Benefits?
An accelerated death benefit can offer financial relief during difficult times, providing much-needed funds to cover expenses when facing a serious illness or needing long-term care.
“I often describe accelerated death benefits as a kind of umbrella insurance built into your life insurance policy. To me it’s like a fail-safe for the gaps of all other health-related insurance,” says D’Andre Clayton, co-founder of Clayton Financial Solutions, a financial planning firm in Greensboro, North Carolina.
For instance, Clayton says that while you can use the money for health care costs, you can also use it for other expenses, such as paying the mortgage or credit card payments or bills that you may have easily paid if you weren’t spending a fortune on health care costs. “To me, that’s invaluable,” Clayton says.
Making the rider even more appealing, Clayton says that adding one on is not that expensive. In fact, some policies allow you to add the rider for free.
Josh Anderson, president and CEO of Eagle Legacy & Financial, a financial services company in Eagle, Idaho, is also a fan of accelerated death benefits.
“In a day and age where there are fewer options to obtain affordable and favorable long-term care coverage, life insurance companies have stepped in to save the day with accelerated death benefits,” Anderson says.
Anderson likes that, typically, with accelerated death benefits, policyholders are given cash, rather than the money going directly to a hospital or a physician’s office.
“This means that the individual, or their custodian, can spend the money in any way they feel fit, for the benefit of the policy holder. They are not limited to a daily amount paid only to care providers like standard long-term care plans,” Anderson says.
[READ: What to Say to Someone Who Is Dying]
What Are the Disadvantages of Accelerated Death Benefits?
There is one downside of adding an accelerated death benefit to your life insurance policy: You take out a life insurance policy to ensure that your beneficiaries are financially taken care of after you’re gone. So, taking money for your health care while you’re alive may undermine the reason you bought the life insurance policy in the first place. Any money you use to help you get by during your illness won’t be there for your beneficiaries when you’re no longer around.
In addition, these accelerated death benefits tend to be useful if you’re dying; it probably won’t help you if you are, say, infirmed indefinitely in a nursing home and are simply hoping to use the money to pay for your care. That’s why some people purchase long-term care insurance to help budget for expenses such as nursing homes and assisted-living facilities.
Of course, many people hesitate to activate their accelerated death benefit because they see it as taking money out of the hands of their beneficiaries, since the money would otherwise be their inheritance.
“My perspective, though, is if being triggered extends the life of the insured by even one month, the family will not miss what was used,” Clayton says.
If you get the accelerated death benefit, you don’t have to use it. You’ll at least have the choice to make that decision, which is why it’s worth considering.
[READ: How to Pay for Nursing Homes With Hospice Care]
Additional Accelerated Death Benefit Information to Keep in Mind
You have to be healthy to get a life insurance policy with an accelerated death benefit, Anderson says.
You’ll also want to read the fine print. As with any insurance policy or add-on to a policy, there are guidelines and rules, and you don’t want to make assumptions. A few factors to keep in mind include:
The payout
Not all insurance policies are the same when it comes to accelerated death benefits. Some policies allow you to take out up to 20% of the benefit, while other policies may let you take out 100% of the benefit.
Paying for the accelerated death benefits
As noted, these benefits are often free, or there may be an administrative fee when you access the accelerated death benefit. Generally, there are two main categories, according to Keith Friedman, the founder and CEO of FBO Strategies in Stamford, Connecticut, an insurance and estate planning firm: “One, you pay for the rider, and it gives you a little more flexibility on accessing the money. The second typically does not cost anything but is slightly more restrictive when you need the funds.”
Restrictive? How?
While many policies will send you your money in a lump sum, no questions asked, there are some instances in which your policy may, Friedman says, make you submit bills to the insurer for reimbursement. He also says that it’s common for some policies to have caps on daily coverage amounts based on IRS limits, even though your policy benefits may qualify you for a higher amount.
Taxes
The cash received from an accelerated death benefit is typically not taxed, although you may need to report the money.
Still, it would be beneficial to consult with your tax advisor about how an accelerated death benefit might impact your taxes. The general rule of thumb is that if you receive the money in a lump sum, it won’t be taxed. If it comes to you in installments, and interest can be earned over a period of time, you may pay taxes on it.
Potential restrictions
While some policies may let you spend your money on, say, one last vacation that is on your bucket list, others may not. You’ll need to be aware of the restrictions or distinctions between policies. If you are receiving Medicaid or Supplemental Security Income, and you receive an accelerated death benefit, it could interfere with your ability to continue to receive that government income.
Bottom Line: Is an Accelerated Death Benefit a Good Idea?
Only you can decide if an accelerated death benefit is worth it for you, but if it’s free to add the rider to your policy, or there’s only a fee if you use the benefit, it really can’t hurt to add it.
It may be helpful to think of an accelerated death benefit as one of those fire alarm pull boxes with a glass cover and the sign, “Only break in case of an emergency.” An accelerated death benefit is there if you have a life insurance policy and someday develop a fatal illness or condition that could turn into a financial crisis. It’s an insurance rider that could be a comfort to have and offer some peace of mind, but with any luck, after adding it to your policy, you’ll never have to think about an accelerated death benefit again.
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What Is an Accelerated Death Benefit and How Does It Work? originally appeared on usnews.com
