Many life policies offer accelerated benefits (often called living benefits) that pay off during the life of the policy owner. Those benefits are accelerated if they are paid directly to a chronically or terminally ill policy owner before he or she dies. Provisions for accelerated or "living benefits" may be included in a policy when purchased or attached as a rider.
Certain medical circumstances can trigger eligibility for early payment of all or a portion of your policy's proceeds, including:
- Terminal illness, with death expected within 24 months.
- Acute illness, such as acute heart disease or AIDS, which would result in a drastically reduced life span without extensive treatment.
- Catastrophic illness requiring extraordinary treatment, such as an organ transplant.
- Long-term care needed because you cannot perform a number of daily living activities, such as bathing, dressing, or eating.
- Permanent confinement in a nursing home.
Some people are surprised that such a benefit is available thinking that they would not be insurable if ill. While that is likely accurate, the time to get a life insurance policy with the living benefits rider is when you're in good health. Once insured, that policy is yours for life as long as premiums are paid.
In general, accelerated benefits can range from 25 to 95 percent of the death benefit. The payment depends on your policy's face value, the terms of your contract, and the state you live in. Some companies will permit you to accelerate 100 percent of your policy's face value, but will reduce the amount of your benefit to compensate for the interest it loses on early payout. The amount of your benefit will also be reduced by any outstanding loans against your policy.
In most cases accelerated benefits are not subject to federal income taxes. Under the federal tax code, a terminally ill person (defined as a person having only 24 months to live) would not have to pay taxes on accelerated benefits. A chronically ill person is usually exempt but may have to qualify for the exemption by being certified each year. To ensure compliance with current tax laws, check with a local tax advisor.
What happens when you die? Let's say you have a policy with a death benefit of $500,000 that makes 100% of the benefit available as accelerated benefits and you receive $200,000 as accelerated benefits during your lifetime. At death, your heirs receive the remaining $300,000. Essentially, the amount paid to your beneficiary is reduced by the amount you received as an accelerated benefit. If your policy's proceeds are entirely depleted, no benefit is paid after your death.
Want to see an illustration? Ask your insurance agent or financial advisor.