What is an Accelerated Death Benefit?
An Accelerated Death Benefit (ADB)—sometimes referred to as a terminal illness rider or living benefit rider—is a provision in a life insurance policy that allows policyholders with a terminal illness to access a portion of their death benefit while they’re still alive. While facing a terminal diagnosis is emotionally and financially overwhelming, an ADB can provide critical relief by offering funds when they’re needed most.
ADB riders are designed to help cover immediate costs, such as medical bills, long-term care, or daily living expenses, easing the financial burden during an already difficult time.
How Does an Accelerated Death Benefit Rider Work?
Accelerated Death Benefits are deducted from your policy’s overall death benefit—the amount originally intended for your beneficiary. When you qualify, you can choose how much of the benefit to accelerate, up to the limit set by your insurer. The remaining amount will still go to your beneficiary upon your passing.
Many insurance companies cap the ADB withdrawal at 50% of your death benefit or a maximum of $250,000, though some policies may allow more. For example, certain policies from Prudential allow up to 100%, but this typically comes with higher premiums. If you don’t withdraw the full benefit, you’ll need to continue paying premiums to keep the policy active. Most insurers also require your policy’s face value to be at least $25,000 to qualify for an ADB.
Policyholders can usually choose between receiving their funds as a lump sum or through incremental payments. If your current policy doesn’t include an ADB, it may be possible to add one as a rider for a small additional fee—though availability often depends on your health at the time of request.
How Do Viatical Settlements Play a Role?
If your policy doesn’t offer an ADB—or if you’re looking to maximize your cash return—a viatical settlement may be a more suitable option. In a viatical settlement, you sell your life insurance policy to a third party in exchange for a lump sum payment. This amount is often greater than what you’d receive through an ADB, because the settlement provider assumes future premium payments and becomes the beneficiary.
Like ADBs, viatical settlements are designed for individuals with terminal illnesses. They can be a helpful solution for those who no longer need life insurance coverage and would rather convert their policy into immediate cash.
What is the Purpose of Having an Accelerated Death Benefit?
The value of an ADB goes beyond finances. These riders serve two important purposes:
- Immediate Financial Relief – They provide policyholders with tax-free funds to help cover medical costs and other critical expenses.
- Peace of Mind – Knowing you can access part of your life insurance benefit during a health crisis offers a sense of control, dignity, and reassurance for both you and your loved ones.
Cost and Policy Details
Depending on your policy, an ADB may be:
- Included automatically at no additional cost
- Available as an optional rider, requiring a one-time fee or small percentage of the death benefit
While ADBs do not typically increase your premiums upfront, accessing the benefit reduces the policy’s face value, which may result in lower ongoing premium payments.
However, policyholders should also be aware of financial assistance implications. In some cases, receiving an ADB may affect your eligibility for government programs like Medicaid or Supplemental Security Income (SSI). It’s important to speak with a financial advisor or estate planner before making a decision.
Example of Accelerated Death Benefits in Action
Let’s say a policyholder has a $1 million life insurance policy and receives a terminal diagnosis. After meeting the insurer’s qualifications, they choose to access 50% of their benefit—or $500,000—via their ADB rider.
This lump sum allows them to:
- Pay for in-home nursing care
- Modify their home for accessibility
- Cover daily living expenses while unable to work
The remaining $500,000 will still be passed on to their beneficiary after their passing, though ongoing premium costs may be adjusted downward based on the reduced death benefit.
Special Considerations of Accelerated Death Benefits
- Tax Exemption: ADB payouts are tax-free for policyholders with a certified terminal illness, under IRS rules.
- Not a Replacement for Long-Term Care Insurance: While an ADB can provide funds that ease long-term care costs, it does not replace the broader, dedicated benefits of long-term care insurance. Instead, it can supplement such coverage.
- Comparison to Other Riders:
- ADB provides early access to the death benefit under specific health conditions.
- Chronic care riders cover individuals who cannot perform daily activities.
- Long-term care riders are more comprehensive, often offering larger benefits over time but usually come with higher premiums.
How Can You Use an Accelerated Death Benefit?
One of the key advantages of ADBs is flexibility. Once approved, you can use the funds however you see fit, including for:
- Out-of-pocket medical expenses
- In-home care, hospice, or assisted living
- Long-term care facility costs
- General household or family expenses
This flexibility allows individuals to prioritize quality of life and allocate resources where they matter most.
Types of Accelerated Death Benefits
ADB riders may be included in both term and permanent life insurance policies (such as Whole Life or Universal Life). There are four main types of ADB coverage:
1. Terminal Illness
Applies to policyholders diagnosed with a condition expected to result in death within 12 to 24 months, depending on the insurer. A doctor must certify your diagnosis. Common qualifying illnesses include:
- Late-stage cancer
- Advanced heart or liver disease
- End-stage pulmonary disease
- Dementia
- HIV/AIDS
2. Critical Illness
Covers serious but potentially survivable conditions that may shorten life expectancy or cause significant hardship. This coverage is often associated with higher premiums due to its broader eligibility. Examples include:
- Cancer
- Stroke
- Heart attack
- Major organ transplant
- ALS (Lou Gehrig’s disease)
- Parkinson’s disease
- Alzheimer’s disease
3. Chronic Illness
Applies when a condition limits your ability to perform at least two basic daily activities (like bathing, dressing, or eating), or causes cognitive impairment. Common chronic illnesses include:
- Diabetes
- Heart disease
- Respiratory illnesses
- Long-term effects of cancer or HIV
4. Long-Term Care
If you’ve been in a long-term care facility for six months or more and will likely remain there, you may qualify to receive accelerated benefits under this provision.
Who Is Eligible for an ADB?
Eligibility depends on your specific policy and insurer, but generally, you must:
- Have a life expectancy of 12–24 months, certified by a physician (for terminal illness coverage)
- Have a qualifying critical or chronic illness
- Meet any additional health, policy age, or minimum face value requirements set by the insurer
Note that some policies may exclude ADB eligibility within the final 18 months of a term life insurance policy. Always review your policy details or speak with your insurer for confirmation.
How Much Can You Receive?
The advance amount is based on your policy’s face value and the insurer’s guidelines. For example:
- If your death benefit is $100,000 and your insurer allows a 75% advance, you could receive $75,000.
- Administrative fees may apply, reducing the total received.
The remainder of your death benefit will still go to your beneficiary unless the full amount is accelerated.
Are Accelerated Death Benefits Taxable?
If you’re wondering, “Are accelerated death benefits taxable?” No—ADB payouts are generally not taxed. Like traditional death benefits, ADBs are typically tax-free under IRS guidelines.
However, there are exceptions. If you have foreign assets or receive large incremental payments, it may impact your tax situation or affect eligibility for certain benefits like Medicaid. It’s wise to consult with a financial advisor to understand the implications based on your unique circumstances.
Alternatives to ADBs
If an ADB isn’t right for you, or if your policy doesn’t offer one, consider:
Life Settlements
Sell your policy for a lump sum—often higher than an ADB payout—and relieve yourself of future premium payments.
Viatical Settlements
A specific type of life settlement for individuals with terminal illness. Often offers the highest return among all options.
These alternatives are particularly useful if:
- You no longer need life insurance coverage
- You want more flexibility with how much you can receive
- Your policy doesn’t include an ADB rider
Pros and Cons of Accelerated Death Benefits
Pros:
- Access funds when you need them most
- Tax-free benefit
- Use money for any purpose (medical bills, caregiving, family support)
- Peace of mind knowing you have a financial cushion
Cons:
- Not all policies include ADBs (they may require a rider at added cost)
- Strict eligibility requirements
- Reduces the total benefit left for your beneficiary
- May affect eligibility for Medicaid or other financial assistance programs
Final Thoughts
An Accelerated Death Benefit can be a vital safety net for individuals facing serious health challenges. It offers the chance to live your final months or years with dignity, financial stability, and a greater sense of control. Whether used to pay medical bills, arrange long-term care, or simply enjoy time with family, this rider can help transform a life insurance policy into a source of comfort when it’s needed most.
If your policy doesn’t include an ADB, or if you’re exploring other options, a life or viatical settlement could be a valuable alternative. Talk to your insurance provider or a financial advisor to determine the best path forward based on your needs.
Coventry Direct does not offer tax or legal advice. This material has been prepared for informational purposes only and should not be relied upon for tax or legal advice. Coventry Direct urges you to consult with your own tax or legal advisors before entering into any transaction.
