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Man holds female hospital patient's handWhen buying life insurance, you may be asked whether you’d like to add on various riders. Riders enhance the policy’s benefits and there are a number you can choose from, including an accelerated death benefit. Adding on this benefit may be something you’re interested in if you’re concerned about being unable to meet medical expenses for end-of-life care in a terminal illness situation. If you’re thinking of buying life insurance to provide some financial peace of mind for your loved ones, it’s important to consider how an accelerated death benefit may fit into your plans. You may also want to enlist the help of an expert financial advisor to see if an accelerated death benefit fits into your entire financial strategy.

What Is an Accelerated Death Benefit?

An accelerated death benefit is a rider you can include in a life insurance policy that allows you to access some or all of your policy’s death benefit while you’re still alive. Typically, accelerated death benefit riders are designed to help pay for medical care if you become terminally ill or you have a qualifying medical condition.

Accelerated death benefits are sometimes called living benefits since you take advantage of them while you’re still living. Ordinarily, a life insurance policy doesn’t pay out benefits until after you die and those benefits are paid to your policy’s beneficiary.

How an Accelerated Death Benefit Works

Man at cemeteryMany insurance companies offer the option to add on an accelerated death benefit to a standard life insurance policy. Depending on the company, you may or may not have to pay a fee to get this added benefit. When you have an accelerated death benefit in place, you can tap into your policy’s total death benefit to pay for healthcare. Typically, your insurance policy will specify when you can or can’t use your death benefit this way.

For example, you may only be able to use an accelerated death benefit rider if you develop one or more specific illnesses. Or your doctor may have to state that you only have a certain amount of time left to live for you to access your death benefit.

When you use your accelerated death benefit option you’re effectively drawing down some of the policy’s death benefit. So if you have a $1 million life insurance policy with an accelerated death benefit rider, you might be able to use $100,000 or $200,000 of that during your lifetime to pay for qualifying expenses. The rest of your death benefit would be paid out to your beneficiaries when you die.

The amount you can withdraw from the policy’s death benefit typically depends on the rules set down by your insurance company. For example, you may be capped at a certain dollar amount. Or you may be limited to withdrawing a certain percentage, such as 50%, of your policy’s total death benefit.

When you use the accelerated death benefit, your remaining death benefit is adjusted, and your premium costs may adjust as well. Your insurance company may reduce your premiums to reflect the new face value dollar amount of the policy after accelerated benefits are deducted.

Accelerated Death Benefit Pros and Cons

There are advantages to including an accelerated death benefit, as well as a few disadvantages. If you’re considering adding this on to a life insurance policy you plan to buy, here are some things to weigh in the balance.

Pros:

  • Accelerated death benefits can help you pay for end-of-life care without draining other assets or leaving your loved ones with high medical bills
  • Living benefits can also be used to pay other costs, such as day-to-day living expenses for your family or to clear accumulated debts
  • Depending on the insurance company, you may pay nothing extra to add this rider on to your policy
  • If you don’t end up needing to use the accelerated death benefit, the full death benefit from your policy can be passed on to your beneficiaries

Cons:

  • Using living benefits reduces the death benefit amount you can leave behind for your loved ones
  • Your insurance company may tack on administrative fees for paying out an accelerated benefit
  • It’s possible that your accelerated death benefit may not be enough to cover your financial needs
  • Depending on how benefits are paid out, they could affect your ability to qualify for Medicaid to help pay for long-term care

In terms of who needs a living benefits rider, it really depends on your health and financial situation. If you’re relatively healthy and expect to stay that way, then an accelerated death benefit rider may not be necessary. But if you don’t have other financial assets to help pay for expenses related to a chronic or terminal illness, it may be good to have, especially if you’re able to include this benefit at no extra cost.

Qualifying for a Living Benefits Rider

If you’re interested in getting an accelerated death benefit with your life insurance policy, it may be as simple as asking your life insurance agent. The tricky part may be actually using those benefits down the line.

Remember, you need to have a qualifying medical situation to be able to access living benefits from your policy. Depending on the insurance company that could include:

  • Being diagnosed with a critical illness such as cancer or kidney failure
  • Developing a chronic illness that prevents you from managing your own day-to-day care
  • Requiring long-term care in a nursing home

It’s important to read the fine print on accelerated death benefit riders to know exactly what’s covered and how you can use the money. Generally, however, the riders can help to pay for nursing home care, in-home caretakers, hospice care and other medical bills related to your care.

Life Insurance Loans Are an Alternative

Cash value life insurance policies allow you to accumulate cash value over time as you pay in premiums. While these policies may include living benefit riders, you may also be able to access cash value by borrowing instead. You could then pay back the amount you borrow to the policy and assuming a loan is repaid in full, it wouldn’t diminish your death benefit payout.

This can be a convenient way to access money from a life insurance policy in situations where you need cash but the need isn’t related to a terminal or chronic illness. Just keep in mind that cash value policies can be more expensive than term life policies where premiums are concerned. And any loans that aren’t repaid in your lifetime will reduce the policy’s overall death benefit.

The Bottom Line

Probate of will documents

An accelerated death benefit can enhance a life insurance policy’s value if you think you may need funds to pay for end-of-life care. These riders can help pay those costs without completely draining your policy’s death benefit or requiring you to spend down other assets. Talking to an insurance agent about the pros and cons can help you decide whether a living benefit rider makes sense for you.

Tips for Buying Life Insurance

  • Consider talking to a financial advisor about how much life insurance you might need to protect your loved ones if you die – and especially if you suffer an expensive illness before that. If you don’t have an advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor free tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.
  • If you’re looking for other ways to create savings and income for your later years, an annuity is another insurance product you may consider. An annuity is an insurance contract that allows you to pay in premiums for a set period of time, then receive payments back later.

Photo credit: ©iStock.com/kieferpix, ©iStock.com/ajkkafe, ©iStock.com/stocknshares

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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