Do you want to purchase life insurance, but the high price has you worried you won’t be able to handle an emergency? Accelerated death benefit (ADB) riders allow you to receive your death benefit while you are still alive.
ADB riders attach onto a life insurance policy and can be used to take cash advances against your future death benefit if you get diagnosed with a qualifying condition.
The accelerated death benefit is often used for people who have a terminal illness and need the money for treatment and other costs to stay alive. Learn all about ADB riders and if they are right for you.
Key Takeaways:
- Accelerated death benefit (ADB) riders allow you to access a portion of your death benefit amount while still living.
- Accelerated death benefit riders require proof of a qualifying chronical or terminal illness before allowing you access to the benefit.
- Taking an accelerated death benefit does reduce the amount of money received by beneficiaries.
- Accelerated death benefits are usually not taxed as income (tax-efficient).
- You should work with your financial advisor as there may be other options to access cash from your life insurance policy. For instance, a policy loan against the cash value.
What Is An Accelerated Death Benefit Rider?
Accelerated death benefit (ADB) riders are part of a wide range of ‘living benefit’ riders. These allow you to access your death benefit while still alive if you get a qualifying condition.
ADB riders typically are for those who have a chronic or terminal illness and want to use their death benefit for treatment and end of life costs. In general, a terminal illness is one that has less than 2 years of life expectancy.
Accelerated death benefit riders can come standard on policies or may be available for an additional charge. Riders attach onto your life insurance policy to allow you to better customize it to your needs. (Read all about life insurance riders here).
Some accelerated death benefit riders only allow access to part of the death benefit and others will accelerate the entire amount. Additionally, some riders will pay a percent of the death benefit monthly, some will pay a lump sum amount, and others will reimburse you for claims you submit.
What Is The Purpose Of An Accelerated Death Benefit Rider On Your Life Insurance Policy?
ADB riders exist to help you if you get terminally ill. The money is intended to help cover your healthcare costs and other end of life expenses.
If you get diagnosed with a chronic or terminal illness, the costs can be staggering. Typically, this means forcing you to take on massive amounts of debt that your beneficiary will need to pay off with your death benefit. However, with an accelerated death benefit rider, you can use your death benefit to avoid debt.
Many ADB riders have a waiver of premium feature included or it may be a separate rider on the life insurance policy. Waiver of premium riders allow you to skip paying premiums with a qualifying condition, however your policy continues on as if you were still paying. This helps decrease a cost to you as well as ensures your policy remains inforce.
You need to review your plan documents to see what riders you have available and what they cover.
How Does An Accelerated Death Benefit Rider Work?
If you choose an accelerated death benefit rider, you will be able to access your money to pay for healthcare costs and to help you during your end of life period. The ADB rider became very popular during the 1980s and the AIDS epidemic.
As such, ADB riders are in a class of ‘living benefit’ riders or ‘terminal illness riders’. These riders kick in to allow you to access your death benefit while living and to help with a terminal illness.
There are many different types of ADB riders and each insurance company will have a different version from one another. Often insurance companies will have multiple versions of ADB riders available on products.
Typically, accelerated death benefit riders have qualifying conditions for:
- Terminal illness diagnosis
- Diagnosed with under 2 years to live
- Need an organ transplant
- Long-term hospice care
- If you fail 2 activities of daily living (ADLs)
However, each rider will have a unique list of qualifying conditions. Therefore you will want to read your policy documents.
If you want a living benefit, there will likely be an additional charge on your policy. Although, some life insurance products do offer simple living benefits for no explicit charge.
Lastly, there is often a tax benefit on ADB riders where the paid out amount isn’t taxed as income.
Example of Accelerated Death Benefit
Assume John has $1 million of permanent life insurance with an ADB rider. He gets diagnosed with a terminal cancer at 45 and decides he wants to accelerate half of his death benefit.
John makes a claim to his insurance company and depending on the ADB rider, they will tell him his lump sum or benefit stream amounts. If John accepts, the death benefit on his policy will decrease to $500,000. John then receives his money per the rider instructions.
Some ADB riders pay out money that John can use for any expense. While others may require costs to be sent and John gets reimbursed.
How Much Money Can You Collect Early?
The amount of death benefit that you can accelerate will be spelled out in your policy documents and will vary based on:
- ADB rider design
- Base life insurance policy’s face amount
- Any outstanding loans
- The state you live in
Most insurance company’s ADB riders allow between 25% to 100% according to the American Council of Life Insurers (ACLI).
When you access money through your ADB rider, your death benefit will be reduced.
Pros & Cons of An Accelerated Death Benefit Rider
Accelerated death benefit riders come in many different forms. In general, there are some major benefits and downsides to accelerating your death benefit.
Benefits of ADB Riders
Accelerated death benefit riders can be a major relief if you get diagnosed with a terminal illness. There are some key pros of the ADB rider:
- Access Money You Need: If you get diagnosed with a terminal illness, the last thing you want is the added stress of debt and figuring out how to pay for your health care. An ADB rider can help alleviate those issues.
- Tax Free (currently): Currently, if you are diagnosed with a terminal illness, your ADB rider payments are not taxable. However, the IRS is reviewing this.
- Do not owe money back: If you survive your condition, you don’t need to repay any of the funds you took with your ADB rider.
- Can retain some death benefit: You purchased your life insurance policy to leave money to loved ones. An ADB rider can allow you to access some of your death benefit but still leave money for your beneficiary.
- Relatively inexpensive or included in your policy: Some life insurance policies come with a basic ADB rider. But even if you have to purchase the rider, the price of an ADB rider tends to be relatively inexpensive.
Downsides of ADB riders
Despite the benefits, there are some downsides to ADB riders:
- Additional expenses and fees may be charged: Although some ADB riders come included in a life policy with no additional fee, the more generous ADB riders tend to be with a separate charge on your policy. This raises the premiums you pay.
- Decreased Death Benefit: You purchased your life insurance policy to protect your loved ones when you died. But accessing your death benefit will decrease the amount available for your beneficiary.
- Medicaid & supplemental Social Security eligibility: Accelerated death benefits may be considered income for Medicaid eligibility. Although, you can’t be forced to request & collect ADB before qualifying for Medicaid.
- Service Fee: There may be a small fee for electing to accelerate your death benefit
- Tax Law Uncertainty: The current generally accepted guidance is that ADB payments are not taxable. However, the IRS is reviewing and will issue a formal decision.
Alternatives To An ADB Rider
It is comforting to know you can access money from your life insurance policy if you need it for end of life care. However, there are other options you may want to consider as well:
- Use cash value of your permanent life insurance: Permanent life insurance policies have the potential to accumulate cash value. This is money you can access through withdrawals or loans. Although, both withdrawals or loans may impact your death benefit depending on your policy. Additionally, you can surrender your policy and take all the cash value out, net any surrender charges.
- Life insurance settlement: Also known as viatical settlement. You may be able to sell your life insurance to a third party for cash. The company will take over any remaining payments, but will be the beneficiary when you die. This means no death benefit for your family.
- Long-term care insurance: Long-term care (LTC) policies cover expenses like nursing homes, adult care, in-home care, etc. This is a separate insurance policy you would have to purchase.
- Other life insurance riders: There are other riders out there that may help you if you become terminal ill. For example, waiver of premium riders, LTC riders, disability income riders, and critical or chronic illness riders. There are pros and cons to each of these.
The Final Word
Accelerated death benefit riders can be a huge relief during an otherwise stressful time. Depending on the rider, you may be able to access some or all of your future death benefit to help pay for end-of-life care. This helps you avoid taking on debt that will be a burden for your family after you pass.
However, there are some downsides to consider, including impacts to Medicaid and Supplemental Social Security.
Review your policy documents and talk to an advisor before purchasing any rider or accessing your benefit.
Frequently Asked Questions (FAQs):
Accelerated death benefit (ADB) riders are part of a wide range of ‘living benefit’ riders.
These allow you to access your death benefit while still alive if you get a qualifying condition. ADB riders typically are for those who have a chronic or terminal illness and want to use their death benefit for treatment and end of life costs. In general, terminal illness is one that has less than 2 years of life expectancy or less.
Accelerated death benefit riders can come standard on policies or may be available for an additional charge. Riders attach onto your life insurance policy to allow you to better customize it to your needs.
Both accelerated death benefit (ADB) riders and long-term care (LTC) insurance are products to help you with end of life care costs. However there are some major differences.
1) ADB riders are attached to a life insurance policy, meaning any unused benefit will be paid out on the policyholders death. LTC is a separate policy that typically does not have a death benefit component.
2) ADB riders and LTC policies have different qualifying conditions. ADB riders frequently only cover terminal illnesses, while a LTC policy likely covers more expenses around healthcare needs.
Each insurer and rider has their own covered conditions for accessing your ADB. However, some commonly accepted ones are:
1) You are diagnosed with a critical or chronic illness that shortens your life expectancy. This can include cancer, heat attack / disease, stroke, kidney failure, coma, ALS, and many others.
2) You have a catastrophic illness with extraordinary treatment. For example organ transplants.
3) You need long-term care or can’t do 2 or more activities of daily living (ADL) on your own. ADLs include bathing, changing, getting dressed, using the bathroom, eating, etc.
4) You are permanently confined to a nursing home. Typically you need to be there for 6 months to qualify.
Accelerated death benefit riders on life insurance policies allow you to access some or all of your death benefit to pay for expenses if you are terminally ill. Any death benefit you don’t access through the rider will still get paid out to your beneficiaries when you die
Viatical settlements are done through companies that buy your life insurance policy and give you a percent of the death benefit upfront. They takeover your remaining premium payments and become the beneficiary on the policy, meaning they get the full amount of the death benefit when you die. This means there is no death benefit left for your loved ones.
Accelerated death benefit riders can be a major relief if you get diagnosed with a terminal illness. There are some key pros of the ADB rider:
1) Access Money You Need
2) Tax Free (currently)
3) Do not owe money back
4) Can retain some death benefit
5) Relatively inexpensive or included in your policy
Despite the benefits, there are some downsides to ADB riders:
1) Additional expenses and fees may be charged
2) Decreased Death Benefit
3) Medicaid & supplemental Social Security eligibility
4) Service Fees
5) Tax Law Uncertainty
It is comforting to know you can access money from your life insurance policy if you need it for end of life care. However, there are other options you may want to consider as well:
1) Use cash value of your permanent life insurance
2) Life insurance settlement
3) Long-term care insurance
4) Other life insurance riders (ie- waiver of premium riders, LTC riders, disability income riders, and critical or chronic illness riders)
No. Your insurance company can’t cancel or change your coverage if you become terminally ill as long as you pay your premiums.
However, if you knew of a terminal illness diagnosis when you applied for your policy, but withheld that information during underwriting, the insurance company can rescind your policy if they discover you misrepresented your health.
If you own an individual life insurance policy, you likely are unable to access your death benefit for a spouse or dependents illness.
However, some group life insurance policies do allow for accelerating death benefits for dependents. You will need to review your coverage or talk to your workplace human resources/benefits coordinator to find if this is true for your group policy.
No. Despite often being confused, an accidental death rider pays a larger death benefit if your death is from a qualifying accident. Often the payment is double and accidental death riders are also called ‘double indemnity’ riders. Whereas an accelerated death benefit rider (ADB) allows you to access your death benefit if you get diagnosed with a terminal illness.