Mark Cussen, CMFC, has 13+ years of experience as a writer and provides financial education to military service members and the public. Mark is an expert in investing, economics, and market news.
Updated September 12, 2023 Part of the Series Guide to Life InsuranceLife Insurance Basics
Term Life Insurance
Whole Life Insurance
Other Types of Life Insurance
Raising Money From Your Life Insurance
Taxation on Life Insurance Policies
Life insurance policies that include accelerated benefit riders provide several types of coverage to policyholders while they are still alive. They pay benefits on top of the traditional death benefit and cash value to policyholders who have a chronic illness, critical illness, or need long-term care if certain conditions are met.
If you are considering accelerated benefit riders, here is what you need to know.
Also referred to as living benefits or accelerated death benefits, accelerated benefit riders allow policyholders to access death benefits in their life insurance policy while they are alive, under certain conditions. Policyholders receive benefits to cover the costs of a chronic illness, critical illness, or long-term care, but they are still entitled to any remaining cash value and death benefit in the policy. The payout ranges from 25% to 100% of the death benefit.
In some cases, policyholders have a choice as to how the benefits are paid—they can receive either a lump sum or periodic payments from the insurance company, depending on the type of claim and benefit. A policy may also limit the total amount of benefits paid or require a minimum payout.
Some riders can only be purchased at an additional cost, while others are built directly into the policy. Although the former type of rider will cost the policyholder an extra charge upfront in the form of a periodic fee, this type of benefit will pay out the full amount that is stated in the policy.
“No-cost” riders are simply riders that are paid at the time of claim, where the insurance carrier will discount the dollar amount of benefits that are paid to the policy owner according to a formula that takes interest and mortality rates into account, as well as the amount of cash value in the policy.
Like many other types of insurance, accelerated benefits can be paid either as reimbursements or on an indemnity basis, with the benefit going directly to the care providers or other parties requiring payment.
Some policies also offer an extension-of-benefits-rider that usually doubles the amount of accelerated coverage at an additional cost, but without the purchase of additional death benefit. This rider effectively allows cost-conscious consumers to purchase a smaller amount of death benefit and still maintain adequate living benefit protection. Riders known as “linked benefits” can also provide coverage for long-term care (LTC) expenses that equal at least two to three times the face amount of the policy.
Initially, accelerated benefit riders were only offered in cash value policies, such as whole life insurance or universal life insurance, but they are now available in term life insurance products as well. Most LTC riders are still only available with permanent policies.
Here is a closer look at critical illness, chronic illness, and long-term care riders:
Critical illness riders pay out a large portion of the death benefit to policyholders when they are diagnosed with a major condition or suffer significant injuries. This benefit is usually received as a lump-sum payment.
These riders pay out a periodic benefit if the policyholder becomes incapacitated or disabled for an extended period of time. This type of rider typically triggers when the insured becomes unable to perform at least two out of the six activities of daily living, including eating, bathing, toileting, dressing, transferring, and continence.
Long-term care riders commonly require separate full underwriting for the insured but provide more comprehensive coverage for long-term or nursing home expenses than chronic illness benefits. But this comes at a higher cost.
Benefits paid out from accelerated benefit riders while you are alive mean your beneficiaries will receive less when you die. Think of these riders as an advanced payment.
Consumers can be understandably confused by the separation of chronic illness benefits from long-term care, as both seem to fall essentially into the same category. The life insurance industry, however, requires that these two types of benefits remain distinct.
Chronic illness riders are more restrictive by nature than long-term care riders, and one of the key differences between the two is that to qualify for the former, the insured must be permanently incapacitated. Chronic illness riders may also pay out in a lump sum or on an annual basis, while long-term care riders usually have a monthly payout. The cost of processing and managing claims for chronic illness benefits is also typically cheaper than for long-term care riders, which means the cost of chronic illness benefits is lower for consumers.
Although living benefits can be a valuable addition to any life insurance policy, consumers need to consider several key factors before purchasing them. Some of the issues that policy owners must contend with include:
If accelerated benefits are paid out, the death benefit on the policy will be reduced for beneficiaries. Will the policy owner’s estate plan remain intact?
Accelerated benefit riders do not completely substitute separate policies that are specifically designed to cover certain risks, such as a disability or health insurance.
Payouts from accelerated benefits may impact Medicaid eligibility. The income paid out from accelerated riders is often counted as income for Medicaid, although applicants are not required by law to exhaust these benefits before they can be considered eligible.
In most cases, benefits are not subject to federal taxes if a terminally or chronically ill person meets certain requirements. Under the federal tax code, for example, a terminally ill person is defined as having only 24 months to live.
Don't confuse accelerated benefit riders with viatical settlements. Accelerated benefit riders are essentially the modern equivalent of the viatical settlements that terminally ill policyholders use to raise cash to pay their medical bills. Under these arrangements, policyholders sell their policies to a third-party settlement company for a percentage of the face amount of the policy. The policyholder names the settlement company as the beneficiary of the policy, and the company collects the death benefit after the policyholder passes away.
A subset of life settlements, viatical settlements generally net the seller more than the policy's surrender value, but less than its death benefit.
Accelerated benefit riders have effectively provided consumers with a greater level of control over their insurance protection, according to Jason Kestler, president and CEO of Kestler Financial Group headquartered in Leesburg, Virginia. "Clients are now able to start or stop a stream of income from their policies when they have a qualifying need, and many riders now also provide a cost-of-living adjustment to keep up with inflation."
Market demographics, improved financial education, and the rising cost and need of healthcare have made multi-line protection in a policy more attractive. But those who need specific types of protection from these unique vehicles need to read the fine print and do their homework to understand whether they will receive what they are truly seeking and how much they will pay for it.