There’s one option no term life policy should be without and I didn’t mention it in last Friday’s post: 4 Term Life Options Worth Exploring. No, I wasn’t sand bagging, but some term life policies automatically include this as a “feature” of their term life policy while others add it as an option. What is it? It’s usually referred to as the Accelerated Death Benefit and what it does can be profoundly important.
Why wait until a person dies to access funds from a term life insurance policy when you may need to access them beforehand? The accelerated death benefit enables the policy owner (insured) to do just that. Policies with this option or feature give the insured the ability to tap a portion of their term life policies death benefit before they die. The usual qualifications to receive the benefit are:
- The insured has been diagnosed with a terminal illness
- They usually only have 12 months or less to live
When these conditions are met, the life insurance company will pay a portion of the death benefit provided the insured requests it. The amount paid varies by company and the face amount or total death benefit of the policy. For example:
- A set percentage of the face amount such as 50% to 75% are common ranges
- A maximum dollar amount such as $250,000, $500,000, etc.
- Whatever the amount is, it’s usually paid in one lump sum
The accelerated death benefit is usually the lessor of the percentage or maximum dollar amount. In the case of a person with a $500,000 term life policy, they could receive between $250,000 for a 50% benefit and up to $375,000 for a 75% accelerated benefit. The nice thing is this money can be used any way the insured and their family want it to be used such as:
- Medical expenses
- Pay off the house or other debts
- A final family trip
- Prepaying final expenses
- Setting up a trust
- Investments for the survivors future
- Anything you can imagine
The insurance company has no say in how the money is spent. There are a couple of items one needs to consider before exercising this benefit.
- Most carriers will exercise a processing fee ($250 is typical)
- There may be interest charged against the accelerated benefit that accrues daily and reduces the net amount of the final benefit of the remaining balance
- The accelerated benefit may be viewed as a lien against the policy
- The amount of the accelerated benefit is reduced from the policy’s face amount
- Receipt of the benefit may affect eligibility for public assistance programs such as Medicaid and Aid to Families with Dependent Children (Supplemental Security Income)
- The accelerated benefit may be taxable (consult with your CPA or personal tax advisor)
- Life premiums will still need to be paid
- This benefit will vary from state to state and may not be available in all states
The cost considerations for this option are:
- If it’s viewed as a feature of the policy, there is no additional cost to have this benefit.
- If it’s an option, the cost can range from $0.00 to a small percentage such as 2% to 5% of the total premium.
There is one question that also needs to be addressed and that is, what if the insured experiences a full recovery and lives? Most companies do not expect the accelerated death benefit to be repaid. The remaining balance could be impacted if the insurance company views the benefit as a lien against the policy and is charging interest. In cases like this, the amount of the remaining balance, or net death benefit, could be impacted. It’s best to know before accepting the benefit rather than after.
If you already have a term policy and are interested in this benefit, consult with your agent to determine if it’s available to you. If you’re looking at getting a term policy, make sure this option is available to you. I have access to a number of life insurance companies as an independent agent and not all companies offer this.
What would you use the accelerated death benefit for you? Share your thoughts, suggestions and questions with me on our Google + or Facebook pages or in the comments section of our blog. Clicking on this link’s title provides share your comments or questions. I look forward to hearing from you.
