What Are Accelerated Death Benefits?

An accelerated death benefit (ADB) is a benefit that can be attached to a life insurance policy that enables the policyholder to receive cash advances against the death benefit in the case of being diagnosed with a terminal illness. Many individuals who choose an accelerated death benefit have less than one year to live and use the money for treatments and other costs needed to stay alive.

How Accelerated Death Benefits Work

Choosing an insurance policy with an accelerated death benefit (ADB) allows the policyholder to pay for their daily living in an effort to make it as comfortable as possible while also allowing the holder to look after their family once they pass away. This type of benefit was originally started in the late 1980s in an attempt to alleviate the financial pressures of those that were diagnosed with AIDS.

The accelerated death benefit provision in a life insurance policy is also known as a "living benefit" rider or "terminal illness benefit."

Key Takeaways

  • Accelerated death benefits are typically not taxed as income.
  • In order to qualify for an accelerated death benefit, a policy owner needs to provide proof that he or she is chronically or terminally ill.
  • Taking accelerated death benefits will reduce the amount of money received by beneficiaries.
  • It may be possible to borrow money from a life insurance policy rather than receive benefits in a lump sum.  

Some policies might make an accelerated death benefit available even if it's not mentioned in the contract. You qualify for accelerated death benefits if you contract a terminal illness and are expected to die within two years. You also qualify if you've been diagnosed with an illness that will reduce your expected lifespan, if you need organ transplant because of illness, or if you are in hospice long-term care. Accelerated death benefits are also a possibility if you need assistance with everyday activities like bathing or using the toilet.

Receiving an accelerated death benefit can affect your eligibility for Medicaid and SSI.

The cost of a living benefit can vary according to insurance company and policy. If the coverage is already included, the cost will be included in the policy. If not, then you will have to pay a fee or a percentage of the death benefit.

Example of Accelerated Death Benefits

Consider a 40-year-old named Fred, a preferred non-tobacco user with a $1 million life insurance policy. Fred contracted terminal brain cancer and decided he wanted to accelerate half the face value of his policy and collect an accelerated death benefit.

After reviewing the claim, the insurance company made a lump-sum offer of $265,000. Fred accepted the offer and received a $265,000 payment. His death benefit was decreased by the amount he accelerated ($500,000). After cashing the check, Fred's remaining death benefit was $500,000, and he paid new premiums based on a $500,000 face value instead of the original $1 million face value.

Special Considerations

Accelerated death benefits are usually tax-exempt for individuals expected to die within two years. This type of benefit isn’t meant to substitute for long-term care insurance coverage. It should be used to supplement expenses not covered by a long-term care policy.