What is an accelerated death benefit rider and how does it work?

An accelerated death benefit allows you to tap into your life insurance policy funds before your death. However, doing so has drawbacks. 

A life insurance policy keeps loved ones on solid financial ground if you die. But if you become permanently disabled or terminally ill before you die and need money to pay for ongoing care, you may be able to access the policy while you’re alive with an accelerated death benefit rider. 

An accelerated death benefit rider life insurance allows you to tap into a life insurance benefit while you’re still alive and gives you access to cash to help cover the financial burden of ongoing medical care.

“People who don’t have much time left and who are using the accelerated death benefit use the money for treatments and other costs needed to stay alive,” says Brad Cummins, principal Agent at Insurance Geek.

Read on to learn more about accelerated death benefit riders and whether they’re right for you.

What is an accelerated benefit rider?

Accelerated benefit riders are living benefits that allow a policyholder to tap into life insurance proceeds before dying.

The money advanced to the policy owner can be used for qualifying care, such as:

• Medical care after being diagnosed with a terminal illness
• Long-term care near the end of life
• Ongoing care after being diagnosed with a medically debilitating condition

Some life insurance policies have a built-in accelerated death benefit built in, with the cost included as part of your policy premium. In other cases, policyholders can add the coverage as a rider to their life insurance policy and pay extra.

It’s important to note that the amount you use is deducted from the death benefit. Typically, the reduction will be on a dollar-for-dollar basis.

For example, if you use the accelerated benefit to cover $100,000 in medical care costs, your beneficiaries will receive $100,000 less in death benefits after you die.

How does an accelerated benefit work?

The possibility of something grave happening to us — such as being diagnosed with a terminal illness or becoming the victim of a catastrophic and life-altering accident — is always present.

An accelerated living benefit rider provides a pool of money that you can turn to in the wake of such an event.

“You can get money from the death benefit in the form of cash advances,” Cummins says.

When to use an accelerated death benefit

You can use an accelerated death benefit rider to pay for things such as treatment costs or stays in a facility. For example, someone diagnosed with a terminal disease could use an accelerated death benefit to pay for in-home nursing or hospice care.

Or someone with a chronic illness who can’t care for themselves might use an accelerated benefit to pay for a stay in a long-term care facility.

In addition, an accelerated death benefit can pay for things such as:

• Hospital bills
• Travel for care
• Renovations to help the person stay in the home
• Lost income for the individual or caregiver

Money from an accelerated benefit can be used in ways that help your entire family during a difficult time, Cummins says.

“The cash can also allow family members to have the money needed to stop working to care for you,” he says.

How eligibility for accelerated death benefit riders works

Your individual policy will spell out the terms for when you become eligible for a benefit.

Usually, you become eligible for the benefit if you’re diagnosed with a terminal medical condition and have a life expectancy of 12 months or less.

The amount of accelerated benefit you can withdraw typically is limited to a percentage of the policy’s overall death benefit payment. For example, at Fidelity Life, you can withdraw the lesser of $100,000 or 50% of your benefit, for example. 

To access money via an accelerated death benefit, let your life insurance company know that you have been diagnosed with a covered illness and provide the necessary documentation.

The insurer’s claims department will review the medical records and provide an estimated payout based on the life expectancy.

Types of accelerated benefit riders 

Accelerated death benefit riders offer different types of coverage depending on the nature of the rider. Here are some of the most common types of riders:

•  Critical illness rider: Typically pays those diagnosed with a covered condition. Examples of such conditions may include cancer, heart attack or kidney failure. Procedures such as heart-valve replacement also might qualify for a payout.
• Chronic illness rider: Typically pays after the policyholder is diagnosed with a permanent medical condition. For example, you might qualify for payment if you have a severe cognitive impairment or are unable to perform at least two of the six activities of daily living — bathing, continence, dressing, eating, toileting and transferring.
• Long-term care rider: Typically pays when the insured either is diagnosed with an illness or is involved in an accident that leaves a person unable to care for himself or herself and requires a move to a long-term care facility. Neither standard medical insurance nor Medicare cover stays in long-term care facilities.  

How much does an accelerated death benefit rider cost?

An accelerated death benefit rider is sometimes  included as part of an insurance company’s life insurance policy at no added cost. So, you may find a life insurance policy with the rider and not have to pay higher premiums.

However, some insurance companies and policies may require you to purchase this coverage at an additional cost. And even if the policy is included at no extra charge, you might pay fees when using the rider to obtain payouts.

Are accelerated death benefit riders taxed?

An accelerated death benefit rider provide you with an important way to fund medical care costs. In many cases, the payments are tax-free.

The IRS says accelerated death benefits are excluded from taxation if the insured is terminally ill.

Chronically ill individuals also don’t pay tax on their accelerated benefit if they use the rider to pay for costs incurred for qualified long-term care services.

However, in other situations, you may owe taxes on the cash you withdraw. You can learn more about the tax implications of accelerated benefits in IRS Publication 525, “Taxable and Nontaxable Income.” Consulting a tax professional also is wise before you take any accelerated death benefits.

Are accelerated benefit riders worth it?

In many cases, accelerated death benefit riders are provided at no extra cost. So, there is no downside to the benefit in those situations.

With other policies, you might have to pay for the benefit by purchasing it as a rider. If that is the case, you might want to discuss the matter with your family and a financial adviser to determine if it makes sense to pay more for the benefit.

Always remember that if you tap into the accelerated death benefit, it will reduce the payout to your beneficiaries upon your death. For this reason, you might think twice about using the accelerated death benefit even if it is available. 

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