What is an accelerated death benefit rider?

Life insurance riders are additional benefits that you can pay to add to a basic life insurance policy. An accelerated death benefit rider is a feature that’s available as part of many types of life insurance policies—term life, whole life, etc. It allows you to get some (or all) of your life insurance money, EARLY, to use while you’re still alive. The condition is that you have a terminal illness with a life expectancy of six months to two years. The payout varies from insurer to insurer and it’s always a percentage of the death benefit that’s in your contract, and, in some cases, the full amount—subject to potential fees and interest.

Why do these riders exist?

The answer here is simple. The whole point of life insurance is to make sure your loved ones are taken care of—financially—when you die. So, knowing that you’re dying, it’s only fair that you’re given this money, early, to help with medical bills and the cost of making final arrangements, etc.

How do they work?

Assuming your insurance policy has an accelerated death benefit, and you’ve signed up for it, you should get quick access to your cash if you get a terminal illness with a less-than-two-year life expectancy. Life insurer, AIG, for example, pays up to $250,000 or the face value of your policy, whichever is less, if you have a qualifying terminal illness. And the scene looks similar with most insurers. After that first round of money’s been paid, the remaining $$ would then go to your beneficiaries when you die. But remember, since you did get an early payout, the money your beneficiary gets will be reduced (womp, womp). So, keep that in mind and balance your books accordingly.

Who qualifies for a terminal illness rider?

Situations that qualify for an accelerated death benefit vary. But here are some common ones that are covered under most of these riders:

• You’re diagnosed with a terminal illness (obvs)
• You’re diagnosed with a critical illness. These include cancer, heart attack, stroke, kidney failure, major organ transplant, and more.
• You’re diagnosed with a chronic illness that stops you from doing two of these six daily activities: walking without help, eating, getting dressed, maintaining personal hygiene, using the toilet without help, and controlling bladder and bowel function.
• You’re permanently confined to a nursing home for end-of-life care.

Also, marital status, income, and geographical location are usually not factors in determining your eligibility for this benefit.

When is an accelerated death benefit not a good idea?

There are times when this benefit might not be the right choice. For example, if getting money via an accelerated death benefit would interfere with any Medicaid or other public assistance benefits. Also, if there could be any potential tax consequences… (accelerated death benefits usually aren’t subject to federal income tax, but there are certain situations where you might have to pay taxes). Anyway, it’s always a good idea to stay on the right side of the law so that you don’t inadvertently screw over loved ones during an already tricky time. Your safest bet? Speak to a tax advisor before mixing and matching benefits and/or playing fast and loose with your taxes.

What are some alternatives?

If it turns out that getting a terminal illness rider isn’t the best idea for your unique situation, you still have options:

1. Sell your policy! Yep, there are situations in which you can sell a life insurance policy via a viatical settlement. The way it works is that a company will buy your life insurance policy and pay you anywhere from 55% to 80% of the death benefit. That company then becomes your beneficiary and receives the full payout of your policy when you die.
2. Get long-term care insurance. This type of insurance helps cover the long-term care of someone with a chronic medical condition—and that includes things like the cost of routine daily activities like getting in and out of bed, bathing, dressing, etc. Expensive, yes. But, probably worth it in, well, the long term. Also, this is a good route to take if you don’t want your benefits to be restricted to a % of your policy’s death benefit.
3. Dip into the cash value of your whole life insurance policy (if you have one). These types of policies allow you to borrow or withdraw from the accumulated value of your account. Keep in mind there are consequences or trade-offs if you do want to access the cash value.

So there you have it: everything you’ve wanted to know about accelerated death benefit riders. Heads up: to qualify for an accelerated payout, your insurance company will more than likely need a certified note from your doctor or a medical professional saying that you’re ill (unfortunately, fakers exist).

Hopefully, you’ll never need to cash in on this rider but we hope you found this info helpful—just in case life leads you or a loved one down an unexpected path.