Accelerated Benefits

What are Accelerated Benefits

"Accelerated benefits" refers to a clause in certain life insurance policies that enables the policyholder to receive the benefits before death. Accelerated benefits are normally reserved for those that suffer from a terminal illness, have a long-term high-cost illness, require permanent nursing home confinement, or have a medically incapacitating condition.

Some insurance companies differ on how much cash can be pulled out and how close to death the insured has to be in order to receive these benefits. Insurers may offer anywhere from 25 to 100 percent of the death benefit as an early payment. Accelerated benefits are also referred to as living benefits.

Understanding Accelerated Benefits

Choosing an insurance policy with accelerated benefits 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 his or her 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.

Some policies might make an accelerated benefit available even if it's not mentioned in the contract. You qualify for accelerated benefits if you contract a terminal illness and are expected to die within 6 months to two years. You also qualify if you've been diagnosed with an illness that will reduce your expected lifespan, if you need an organ transplant because of illness or if you are in hospice long-term care. Accelerated benefits are also a possibility if you need assistance with everyday activities like bathing or using the toilet.

The cost of a living benefit can vary according to the 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.

Taxation on Accelerated Benefits

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

Example of Accelerated 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.