Accelerated Death Benefits or ADB
Accelerated Death Benefits, also referred to as living benefits, can be added as a rider to a life insurance policy, either at the time of purchase or afterward.
These benefits will allow terminally ill individuals to access a portion of their life insurance death benefit proceeds prior to their death.
In essence, accelerated death benefits act as a type of lien against the life insurance policy. They will reduce the death benefit that is payable to beneficiaries and can also reduce the amount that is available for loans as well as the cash value of the policy. The lien equals the amount of the living benefits payment that the policyholder receives, plus accrued interest.
The proceeds from a living benefit are deducted from the insurance policy’s face value. These funds may be received by the policyholder as a lump sum or in installment payments. Oftentimes these proceeds may be used to pay medical bills, nursing home expenditures, or even to pay off other bills like a mortgage or take a vacation.
Accelerated death benefits usually pay out between 50 and 80 percent of the insurance policy’s death benefit amount. It is important to note that when a policyholder receives living benefits, they are still responsible for continuing to pay the premiums due on the policy.
In addition, the insurance company will charge the policyholder interest on what they receive from a living benefit, in addition, the death benefit amount received by the policy holder’s beneficiaries will be reduced by the amount of the living benefit that has been received.
A policyholder can access their living benefits when:
- They have a terminal illness and their death is likely to occur within a certain amount of time.
- They will be permanently confined to a nursing home.
- They are unable to perform certain activities of daily living on their own.
The income that is received from a living benefit will not be subject to federal income taxes as long as it meets certain criteria. In order to qualify for a tax-free exemption on living benefits, the policyholder must be classified as being “terminally ill” when he or she files their income taxes. In most states, accelerated death benefits are not subject to state income tax.