What if you could access the death benefit of your life insurance policy while you’re still living? In other words, accelerate the benefits of your policy? And what if your policy had living benefits in addition to your death benefit? Would you be more inclined to purchase a policy?
There’s a common misconception that life insurance doesn’t benefit you, the policyholder, because you’ll never reap any of the financial rewards of your policy. You’ll have peace of mind knowing your family will be taken care of when you’re gone but you won’t see any monetary benefits during your own lifetime. In essence, you pay for it and someone else benefits.
While it’s true that typical life insurance is usually purchased to provide financial support for your family upon your death, where a pre-arranged sum of money is disbursed to your loved ones to be used in any way they choose—from paying off your mortgage, student and auto loans, and taxes, to replacing your income for daily living expenses, it isn’t the only way a policy can be used.
Getting Accelerated Benefits With Whole Life Insurance
Different types of life insurance come with different benefits. When it comes to living benefits, whole life insurance takes the cake. It offers tax advantages, earns guaranteed interest and potential dividends, grows cash value (you can withdraw it for any expense you like, including retirement, or borrow it tax-free), offers liquidity, protects your assets from creditors and judgements, and offers a safe place to put your money not correlated with the stock market. It can also be customized with additional benefits called “policy riders”.
Insurance providers recognize that to truly meet specific needs of individual people and families, one-size-fits-all policies won’t cut it. They need to be customized. So they offer policy riders that are add-on features to whole life insurance policies. Essentially, riders offer benefits and coverage that enhance your basic policy.
There are many types of policy riders, including Guaranteed Insurability rider, Term Conversion rider, Paid-Up Additions rider, Accidental Death Benefit rider and more. These riders range in cost from “included free” to nominal fees, upon exercising the option, to additional premium charges (depending upon the depth and scope of the rider). To learn more about the most commonly used policy riders and how to find the right ones for your financial goals, click here.
This article focuses on the Accelerated Death Benefit rider and the living benefit it provides to policyholders.
The Accelerated Benefit Policy Rider
What if you, the policy-holder and not your beneficiary, are the one who needs financial assistance? When you set up your policy, you can opt to include an Accelerated Death Benefit rider (and you can sometimes add it after your policy is in place).
The accelerated benefit rider allows you to access your policy’s death benefit if you’re diagnosed with a terminal illness, critical or chronic illness, or—in some cases—if you require long-term care. It can also kick in if you need help performing daily functions or if you’re in need of an organ transplant. Insurance companies created this living benefit for policyholders to help address the escalating costs of medical bills for terminally ill patients.
As New York Life Insurance describes their accelerated benefit rider, “(It) can help offer peace of mind at a critical time. It entitles the policy-owner to an early (accelerated) payout of policy death benefits, if the insured is diagnosed with a terminal illness… As a person deals with the emotional and physical struggles of terminal illness…the last thing needed is the additional stress of astronomical medical bills.” (New York Life.com)
While the accelerated benefit rider has become standard in the industry, different companies have different terms and guidelines—and even call this policy rider by different names. A Wealth Strategist can help ensure you’re set up with the right policy riders for your needs.
Who Qualifies for an Accelerated Benefit Policy Rider?
Qualifying for an accelerated benefit rider is based off of your health status. You can access it at any age, provided your policy is active and your medical condition places you in one of the following four categories: terminal illness, critical illness, chronic illness, and long-term care.
Terminal Illness
In general, insurance companies allow the policyholder to access the death benefit of their whole life insurance policy if they are diagnosed with a terminal illness that has shortened their life expectancy to 6 to 24 months.
Payouts for terminally ill policyholders using the accelerated death benefit are usually paid in one lump sum, but they can be structured to reimburse medical costs or be paid out periodically.
Critical Illness
Some medical conditions, while not terminal, may leave you with a shortened life expectancy and increased medical bills. These include, but are not limited to: cancer, heart attack or stroke, coma, kidney failure, and paralysis. In some cases, anyone who requires an organ transplant or who has had an organ transplant may also qualify.
Payouts for critically ill policyholders using the accelerated death benefit usually resemble payouts for terminal illness and are paid in one lump sum, but they can be structured in a variety of ways depending on the policyholder and the insurance company.
Chronic Illness
Policyholders who have a qualifying chronic illness that interferes with daily functions and quality of life can access the death benefit of their whole life insurance policy.
Payouts for chronically ill policyholders using the accelerated death benefit are typically paid annually but can be paid out in one lump sum.
Long-Term Care
Under certain conditions, policyholders who require long-term care may be able to access the death benefit of their whole life insurance policy. Typically the policyholder must require indefinite hospice or nursing home care not otherwise covered by long-term care insurance or disability insurance.
The accelerated benefit rider will not replace other types of health insurance, but payment can be structured as reimbursements for the cost of care or on an indemnity basis, where the insurance company directly pays care providers.
Payment and Payouts
There are two ways to pay for an accelerated death benefit rider: upfront or when you use it. Most insurance companies offer this rider at no cost, but there may be benefits to paying for it upfront. Discuss your family’s needs with your Wealth Strategist to find the right payment structure for your goals.
If you opt for a policy rider from an insurance company that requires payment for your accelerated benefits upfront, you know exactly how much you’ll pay. The cost will be added on to your policy’s base premium, due annually, monthly, or quarterly, depending on how your premium payments are structured.
If you choose a no-cost accelerated benefit rider, you won’t pay anything until you use the rider. If and when you need it, the insurance company will determine how much it will charge you to access your death benefit based on interest and mortality rates at the time of payout.
Regardless of which option you choose, most insurance companies allow you to receive anywhere between 25% and 100% of your death benefit or a set maximum amount, whichever is lowest. The maximum amount is usually capped at $250,000 – $500,000.
Accessing a portion of your death benefit while you’re still living will lower the amount of death benefit you have left for your beneficiaries and may affect the cash value in your policy. It will also lower the premium you pay for your insurance, as the policy will become smaller once you’ve accelerated your benefit.
For example, if your whole life insurance policy has a $1,000,000 death benefit and you use $250,000 in accelerated death benefits (including any fees and/or cost of the rider), your policy will now have a death benefit of $750,000. Your beneficiaries will receive this amount, minus any outstanding policy loans, and your insurance premiums for the remainder of your life will be based on the new, lower amount of the policy.
How is an Accelerated Benefit Policy Rider Used?
Ultimately, the decision of how to use accelerate death benefits is up to the policyholder. Often the money will go toward paying for medical costs not covered by health insurance, like nursing homes or hospice care. It can also be used to supplement the income of a spouse or other family member who has had to reduce their working hours to provide care for the policyholder.
Sometimes, renovations needs to be made to the policyholder’s home so they can safely stay in it. Accelerated death benefits can be used to install wheelchair ramps or remodel bathrooms to be accessible. They can also be used for transportation and necessary vehicle modifications.
If finances allow, one of the best uses of accelerated death benefits is to create lasting memories for loved ones, completing “bucket list” items, and taking family vacations, making the most of the time you have left.
Taxes and Other Considerations
Insurance payouts from an accelerated benefit rider are usually federal income tax-free if they are paid out in one lump sum and don’t exceed the basis of your whole life insurance policy (the total amount you’ve paid in premiums). If you elect to receive your payouts in periodic installments, they may accrue taxable interest.
An accelerated benefit rider may affect your eligibility for other financial assistance, including Social Security income and Medicaid. Be sure to speak with your tax advisor or consult with a Wealth Strategist if you’re considering using an accelerated benefit rider but rely on either of these two forms of financial assistance. It’s possible to structure payouts so you don’t put your other benefits at risk.
Accelerated Benefit Rider vs. Policy Loan
An accelerated benefit policy rider isn’t the only way to access money in an insurance policy while you’re still living. As previously mentioned, with a whole life insurance policy you have the option of taking out a policy loan.
In addition to a death benefit, whole life insurance also has a built-in savings component called the cash surrender value, or cash value. You can borrow your cash value, plus interest, at any time during your life, for any reason. Any unpaid policy loans and their associated interest will be deducted from your death benefit when you pass away.
Policy loans and accelerated death benefits function similarly, so which one should you choose?
If your policy has a high cash value, it makes sense to opt for a policy loan. You’ll receive better tax advantages because your not limited to only using your basis (the amount paid in premiums) before being taxed. You can use a policy loan for any amount tax-free. Plus, your policy will continue to earn interest and dividends based on the full cash surrender value, essentially meaning your dollars work twice as hard.
On the other hand, if you haven’t accumulated much cash value over the life of your policy, an accelerated benefit policy rider can allow you to access more money in the form of an advance on your death benefit.
What’s a Viatical Settlement?
If your family dynamic has changed since you bought your life insurance policy to where your beneficiaries no longer rely on you financially, or if your insurance premiums will be too much of a burden if you’re ill, a viatical settlement is another option for receiving funds from your life insurance while you’re still living.
If you have permanent life insurance, like whole life or universal life, it’s possible to sell your policy to a third party. They pay you a lump sum for your policy—typically more than the cash value of the policy but less than the death benefit. The third party assumes all premium payments and becomes the new beneficiary of your insurance policy.
You must meet the same qualifications for a viaticial settlement as an accelerated benefit rider: terminally ill with 6–24 months to live, critically or chronically ill, requiring an organ transplant or received an organ transplant, or require long-term care that meets certain qualifications.
How to Get an Accelerated Benefit Policy Rider
Many people find the accelerated death benefit rider a very worthwhile addition to their life insurance policy. Again, New York Life sums up why, “The sad irony is that, while the patient may have substantial collateral in life insurance policies, those funds are technically ‘off limits.’ The LBR (Living Benefits Rider) breaks down the ‘off limits’ fence.”
If you would like to know more about your options when it comes to accelerated benefit policy riders and how they might affect the quality of your life, schedule a free accelerated benefit rider consultation with a Paradigm Life agent today.
