Sometimes a little history goes a long way in explaining how we got where we are. This is the case with life insurance and how some of the innovative features and offerings the industry has pioneered, like the Accelerated Death Benefit, came into existence.
Life insurance companies are always facing constant changes and new challenges in the market in order to offer solutions to respond to apparent needs, keep and attract clients. One of those challenges was, without question, the outbreak of AIDS during the 1980s. On one hand, the realities of that epidemic basically started the life settlement market. On the other hand, those same realities pushed life insurance companies to offer new options to relieve some of the financial pressure policyholders diagnosed with AIDS struggled to face. In those days, the effects of the virus were much worse than they are today. While medical innovation was needed to advance treatments, financial innovation was needed to alleviate the very real burden of that diagnosis.
That’s how the Accelerated Death Benefit (ADB) rider – or option – nowadays a standard option in your modern life insurance policy, came to be. The Accelerated Death Benefit allows a policy owner to receive a share of the death benefit of his/her policy while the life insured person is still alive. A fundamental requirement applied by all life insurance carriers is that the insured person under the policy should have a life expectancy of no longer than 2 years. In other words, the insurance company will request sufficient evidence that the life insured is in very poor health. This is a key difference between the accelerated death benefit option and the life settlement option. With life settlements, a terminal condition is not a requirement.
One important consideration is that once you have exercised this option you don’t have to repay the amount that the life insurance company has advanced to you. Conversely, when you decide to use this option you can decide what portion of the death benefit stated in your life insurance policy you would like to have advanced (aka accelerated), subject to contractual limits. The life insurance company then will calculate an amount (% of the accelerated portion) to be paid to you and new premiums for the remaining coverage. The life insurance company will not pay out 100% of the accelerated portion but will deduct 100% of it from the remaining death benefit. For instance, if the policy’s death benefit is $400,000 and 25% is accelerated, the policy owner could receive an amount in the $60,000 – $80,000 range. The remaining death benefit of the policy could become something like $100,000. This is just an example, of course, but this is the essence of how an Accelerated Death Benefit works.
There isn’t a general rule that covers what percentage of the death benefit you can get; every carrier applies its own method and calculations.
Let’s look at a simple list of pros and cons related to Accelerated Death Benefits:
Allows the owner to receive a portion of the death benefit while alive in order to cover some expenses that might otherwise be hard to cope with during a serious illness.
Typically not taxed as income.
Allows the policy owner to leave a portion of the death benefit to their beneficiaries.
That lump sum of cash received by the policy owner could result in the policy owner becoming ineligible for Medicaid and SSI.
Not all carriers provide this option by default.
The ratio of cash obtained/portion of the death benefit accelerated is frequently “not generous”.
4 to 6 weeks processing time required.
There are other options proposed by the carrier that could be more efficient (e.g. loans issued by the life insurance company against the policy’s cash value) or it may be more beneficial to apply for a life settlement/viatical transaction to maximize the value obtained from the policy.