When you shop around for a life insurance quote, it’s important to look for a policy that provides the protection your family needs. Life insurance is intended to provide for your loved ones if you pass away while your policy is in effect so your death does not result in your family facing financial devastation. If you have people depending upon your income or on services you provide, such as caring for children as a stay-at-home spouse, it’s important you have a policy.
However, there’s not just one kind of life insurance policy. There are many policies issued by many insurers, and each policy and life insurance company has its own terms. There are also add-ons, or riders, you can add to your policy to expand the scope of your coverage.
For example, you could add a rider onto your policy that provides for an accelerated death benefit (ADB). If you attach this benefit to your life insurance policy, you may pay slightly higher premiums because of it, but you’ll be able to claim a portion of your death benefit early under certain circumstances. Typically, you can access part of your policy’s cash value in the event of a serious or terminal illness.
With accelerated benefits on your policy, you not only know your family will be provided for if you pass away, but you also have the peace of mind of knowing you can access some of your benefits before your death if you get very sick. In this sense, accelerated benefits are like living benefits.
On this page:
- What Is a Death Benefit?
- What Is an Accelerated Death Benefit?
- Is an Accelerated Death Benefit a Good Idea?
- An Accelerated Death Benefit Helps Your Family in Times of Hardship
What Is a Death Benefit?
To understand accelerated death benefit policies, it is important to first understand what a death benefit is. A death benefit is the amount of money the insurer pays upon your passing if you are covered by a life insurance policy.
The death benefit on your policy could range from a few thousand dollars to millions of dollars. The higher the death benefit, however, the higher the cost of the policy and your premium payment will be. Because you want to ensure your family doesn’t end up in dire financial straits, it is a good idea to make sure you have a pretty big death benefit.
Your policy’s death benefit should be enough that it can help to replace your income in the years you won’t earn money due to your untimely death. You may also want to include enough money in the death benefit to pay for college for your children or to pay off your family’s mortgage. Your insurance agent can help you to decide exactly how large your death benefit should be based on your family’s financial needs.
When you die while covered by a life insurance policy, your death benefit is paid to your designated beneficiary or beneficiaries. You could have just one beneficiary or could name multiple people as beneficiaries and provide instructions for how they should split the death benefit.
>> Read More: What is a life insurance beneficiary?
What Is an Accelerated Death Benefit?
If your policy has an add-on, or rider, that allows for an accelerated death benefit to be paid, this benefit could provide you with funds you need to cope with a serious illness.
With accelerated death benefits, you’re able to borrow from the death benefit so you can claim a portion of its cash value while you are still alive. You can then use the proceeds from the money you receive from the life insurer to cover costs associated with your ailment or to provide for you when you can’t work due to your illness.
Your life insurance policy will detail the circumstances under which you are able to claim the ADB. Typically, you’re able to claim a part of your benefit early if you have been diagnosed with a terminal illness and you are expected to pass away within two years as a result.
Depending upon your insurance contract, you may also be eligible if you are diagnosed with a condition that will reduce your expected lifespan, if you must move to a long-term care facility, if you are in hospice, or if you are in need of an organ transplant.
If you meet the eligibility criteria, you can decide how much of your death benefit to accelerate. For example, if you had a $500,000 policy, you may decide you want to accelerate half of the policy’s face value. This doesn’t mean you’ll receive exactly $250,000, though, because the insurer will make a discounted offer for the $250,000 of the death benefit you want to accelerate.
This discounted cash value is based on the change in life expectancy, and the more substantial the change in life expectancy, the more you’ll be offered. You might, for example, be offered a lump sum payment of $150,000 to accelerate half of your $500,000 policy.
Once you’ve accepted the offer and accelerated a portion of your benefit amount, your death benefit will be reduced based on the amount you accelerated. With the above example, you’d only have a $250,000 policy remaining, and your premiums will be adjusted for the coverage to reflect the new face value of the policy.
Typically, you will not be taxed on the money paid out when you claim an accelerated death benefit as long as you do have a terminal condition expected to result in your death within two years.
Accelerated death benefits can be useful to help you pay for substantial medical expenses resulting from your illness. They can also help cover nursing home or long-term care and other expenses caused by your illness. These ADB riders were initially created during the AIDS epidemic to help people who became sick with AIDS and who needed money to care for themselves. However, they are now open to other life insurance policyholders who become sick for other reasons and need money to help them stay afloat.
>> Read More: Life insurance for people with HIV
Is an Accelerated Death Benefit a Good Idea?
Adding an accelerated death benefit rider onto your insurance policy is usually a good idea. This is typically an affordable policy rider, and it may even be included as a standard option in some types of whole life insurance policies.
While buying this life insurance rider gives you the flexibility you’d need to make a difficult choice if you get sick, ultimately you will need to consider your overall financial situation, your family’s financial needs, and the other kinds of insurance coverage available to you. This additional coverage would be far more useful to someone without good disability, medical, and long-term disability insurance, for example.
If you do opt for an accelerated death benefit, it’s important to note this is not a substitute for other kinds of insurance. While it can help cover costs if you incur nursing home or long-term care bills or if an illness puts you out of work for a while, it is not designed to cover every expense of serious illness.
You still need other types of insurance, including health insurance, disability coverage, and long-term care insurance to maintain your family’s financial situation if you become seriously ill. The portion of your death benefit amount you accelerate will supplement, not replace, these other types of coverage.
An Accelerated Death Benefit Helps Your Family in Times of Hardship
If you can add the option for an accelerated death benefit onto your life insurance policy for an affordable cost, there’s little reason not to take this added protection. You never know when serious chronic illness could strike, and it’s nice to have the option to access your funds if you need money when something happens to you.