What is an Accelerated Death Benefit Rider?

One of the major drawbacks of life insurance, or so it’s typically thought, is that it provides no benefits while you are still alive. It’s seen strictly as a death benefit. But there are certain life insurance riders that can be added to a policy that will provide living benefits.

One of them is an accelerated death benefit rider. It’s a provision added to a policy that will give you access to at least some of your policy’s death benefit while you are still alive—at least under certain very well-defined circumstances.

For most consumers purchasing life insurance, an accelerated death benefit rider is an excellent addition to their policy, even if they never need to use it.

What is an Accelerated Death Benefit Rider?

As the name implies, an accelerated death benefit rider will give you access to some of the death benefit in your life insurance policy prior to your death. This is where the term “accelerated” comes into the picture. The provision doesn’t change the overall death benefit of the policy, it simply rearranges when it will be distributed.

Under the terms of the rider, you’ll typically have access to some or even most of the death benefit in your policy if you develop a terminal illness. Depending on the language in the rider, terminal illness can be defined as the existence of an illness or condition likely to result in your death within one or two years, again depending on the definitions in the policy.

The accelerated death benefit rider acknowledges the fact that many of the costs of a terminal illness are incurred prior to the insured’s death. By enabling the insured to access funds from the death benefit while still alive, valuable medical care services and even living expenses can be paid for from the proceeds of the policy.

In a typical accelerated death benefit rider, the insurance company allows the insured to access a certain percentage of the death benefit, often up to a fixed dollar amount, while still alive. Any unused portion of the death benefit will be paid to the insured’s beneficiaries upon the insured’s death.

In this way, an accelerated death benefit rider means a life insurance policy will provide both a death benefit and living benefits.

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How an Accelerated Death Benefit Rider Works

A typical accelerated death benefit rider will allow you to access anywhere from 50% to as high as 95% of the value of your policy. But, there’s often a maximum dollar amount, which can range anywhere from $250,000 to as much as $1 million.

If you have a $1 million life insurance policy that will allow you to access up to 60% of the death benefit under the accelerated death benefit rider, you could receive up to $600,000 while you were still alive, leaving the remaining $400,000 to pass on to your beneficiaries upon your death.

The proceeds received under an accelerated death benefit rider can be used to pay for a multitude of expenses. For example, it can be used to pay for medical care, hospice, nursing home costs, the services of a private caretaker, or even regular living expenses like housing and health insurance. In some cases, the proceeds can even be used to pay off a major debt, like your home mortgage.

How Much Does an Accelerated Death Benefit Rider Cost?

With most life insurance companies, adding an accelerated death benefit rider will not increase your premium. In fact, some companies offer the rider as a standard provision in their policies. However, never assume this to be the case across-the-board. Some companies may charge an additional premium, but it will be small if they do.

A more likely scenario is that the insurance company will charge an additional fee—either by increasing your premium payments or by charging an administrative fee—at the time you exercise the accelerated death benefit rider.

The higher premium or the imposition of an administrative fee may be worth the cost in the event of a terminal illness, but you should know what the additional amount would be ahead of time. This may even affect your decision to take the rider or not, or to consider moving on to a policy with a different company that does not charge an additional fee.

You should fully expect that most insurance companies will charge some type of fee upon exercising the accelerated death benefit rider. That being the case, your decision may come down to exactly how much the company will charge compared to its competitors. As is the case with all life insurance plans, it always pays to shop among several options. That’s the best way to ensure you get the best policy for the lowest premium.

Can I Qualify for an Accelerated Death Benefit Rider?

With a typical accelerated death benefit rider, you’ll be able to access the funds only if you are determined to be terminally ill, as described earlier. But, since there are so many life insurance companies, and so many different policies offered by each, the provision for the rider can vary.

For example, some insurance companies will allow you to use the rider if you qualify with a critical illness, as in an illness that will shorten your life, but is determined to not be immediately terminal. Examples can include heart attack, stroke, cancer, ALS, kidney failure, or paralysis.

Some policies will also allow you to invoke the accelerated death benefit rider for chronic illnesses. A chronic illness is one in which it is determined you are unable to perform at least two of six Activities for Daily Living (ADLs).

The sixth ADLs are as follows:

1. Bathing: The inability to clean and groom yourself, including bathing, shaving, and brushing your teeth.
2. Dressing: The inability to dress yourself without assistance from others. For example, you may be unable to complete dressing that involves buttons or zippers.
3. Eating: The inability to feed yourself.
4. Transferring: The inability to move yourself from a bed to a wheelchair and back.
5. Toileting: The inability to get on and off the toilet.
6. Continence: The inability to control either your bowel or bladder functions.

Similarly, the accelerated death benefit may be permitted if you are in long-term care for at least six months, and expected to be there permanently. A long-term care requirement is typically necessary due to the same factors that affect chronic illness, namely the inability to perform two or more of the sixth ADLs.

Not all Accelerated Death Benefit Riders Apply to Each Condition

Not all life insurance companies offer accelerated death benefit riders that apply to critical illness, chronic illness, or long-term care. But, some do, and it’s worth investigating if those provisions are offered.

More commonly, a life insurance company will offer benefits for the last three conditions under separate riders, such as a critical illness rider, chronic illness rider, or a separate long-term care policy.

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Are there any Drawbacks to Taking an Accelerated Death Benefit Rider?

The single biggest drawback of an accelerated benefit rider is that it will reduce your final death benefit.

If the primary purpose of your life insurance policy is to provide for your beneficiaries after your death, whether that’s paying off debt, providing for living expenses for multiple years, or funding major expenses like a college education for your children, exercising your options under an accelerated death benefit rider will reduce those benefits.

However, in the event of a terminal illness, covering immediate expenses can easily take priority. That’s the whole purpose for an accelerated death benefit rider.

As discussed earlier, an administrative fee or increased premium at the time of exercising the accelerated death benefit rider is also a potential drawback. But, the degree to which it is will depend on the amount of the fee or premium increase.

Potential Tax Considerations

These considerations are very unlikely to affect most policyholders. But you should be aware of them just in case they may apply to you.

In most cases, receipt of life insurance benefits is not taxable. The one major exception is when your total estate exceeds the $11.58 million estate tax exclusion for federal tax purposes. However, even in that situation, the life insurance benefits themselves are not taxable. Rather, the life insurance proceeds are added to the decedent’s total estate in determining the taxability of the estate.

For example, if you have an estate worth $11 million, and a life insurance policy with a death benefit of $1 million, your total estate would be valued at $12 million for federal estate tax purposes. $420,000 of the estate ($12 million, less $11.58 million) would be subject to the estate tax.

Still, another potentially taxable situation is when you have a life insurance policy with a cash value provision. If the amount of funds you access from your policy exceeds the total premiums you paid into the policy, the excess may be taxable as ordinary income. This is, of course, a special situation and one that will not apply if you have term life insurance, which does not include a cash value provision.

Should I Add an Accelerated Death Benefit Rider?

With many life insurance policies, an accelerated death benefit rider will be automatically included in the plan. You won’t even have to pay extra for it, which will make it an even better option to have.

The major concern will be the backend fees that may apply if you access your death benefits before your death. If the accelerated death benefit is a major reason for purchasing a life insurance policy, you’ll want to be certain that the fees charged will be on the lower end of the industry scale.

To do that, you’ll need the ability to shop among many different life insurance companies. The best way to do that is through an insurance broker. As insurance brokers, we work with dozens of life insurance companies and can place your application with the company or companies that charge the lowest backend fees.

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