How does Accelerated Death Benefit work?
Whole life insurance is designed to provide financial protection in the event of death, whenever it occurs. Additionally, whole life insurance can be a living tool that is most effective in the efficient growth and protection of assets.
[sc_content_link label=”Get today’s insurance rates.” cat=”life”]
Lifetime benefits of whole life insurance are generally regarded as cash values and dividends. In the recent past, the insurance industry made a significant inroad which opened the door to making death benefits available (during the life of the insured) in the form of accelerated benefits for terminal illness. This appeared in the form of a rider which allowed a portion of the death benefits to be paid prior to the death of the insured as long as the insured was terminally ill under the definitions of the whole life insurance policy. Typically, the whole life insurance policy would require a life expectancy of approximately 12 months or less.
Accelerated Benefit Rider
Lifetime benefits of a life insurance have improved and now some policies allow something commonly referred to as an accelerated benefit rider. This rider expands when a whole life insurance policy’s death benefit may be available during the lifetime of the insured. In addition to availability during a terminal illness, the death benefit may now be available to help relieve the financial burden during certain chronic illnesses.
Some whole life insurance companies do not charge an additional premium for this rider. The accelerated proceeds may qualify for favorable tax treatment and may be used in the manner of the policy owner’s choosing. It is not necessary to submit bills or receipts to receive benefit payments under an accelerated benefit rider with some companies. These proceeds will create an interest-bearing loan on the policy (similar to a policy loan) and will reduce the death benefit cash surrender value and loan value. When there is a chronic illness, the amount that a policy owner might accelerate in any given calendar year may be limited to the Internal Revenue Service per diem limitation. (There may be no maximum amount limit for terminal illness). In 2018 this limit is $360 per day when a policy has a face amount of greater than or equal to $250,000 and it is adjusted annually for inflation. The rider may limit the cumulative total in amount limit may be based upon the cash value plus a portion of the net amount to risk of the whole life insurance policy (which may be referred to as the net death benefit ).
An insurance company may limit the issuance of this rider. In other words, it may not be available to substandard risks or those situations where reinsurance is involved or possibly even with corporate-owned whole life insurance policies.
While this type of rider may certainly create funds to help with long-term care situations, it should not be mistaken for long-term care insurance and is not intended to eliminate the need for long-term care insurance.
If the policy owner has this rider and he or she satisfies the necessary triggering conditions, he or she may collect benefits.
Triggering conditions may be caused by chronic illness where 1) the insured is permanently unable to perform without substantial assistance from another individual at least two out of six activities of daily living due to a loss of functional capacity. These ADLs are eating, bathing, continence, dressing, toileting and transferring or 2) the insured requires substantial supervision by another person to protect threats to health and safety due to a severe and permanent cognitive impairment.
[sc_content_link label=”Shop and compare insurance quotes.” cat=”life”]
As mentioned earlier, the terminal illness trigger is when the insured has an illness or physical condition that can reasonably be expected to result in death in 12 months or less.
Some companies will state that upon satisfaction of the qualifying trigger and a 90-day waiting period (for chronic illness only) they will allow the insured to accelerated part of the death benefit through an interest-bearing lien. The benefits may be paid under the terms of the whole life insurance policy without regard to the costs incurred by the insured for qualified long-term care services. The payments may be used any way the insured would like, including long-term care, but this needs to not be confused with long-term care insurance. A waiting period may begin on the date the physician certifies that the insured meets the definition of one of the triggering conditions in the whole life insurance policy.
Accelerated benefits may be excluded from income taxation, but the rules are quite complicated, and taxation may be affected if a policy owner receives funds from a long-term care insurance policy. The policy owner should receive a 1099LTC each year, and a copy is sent to the IRS, an amount equal to benefits paid out during the year under the whole life insurance policy. The insured/policy owner should retain expense documentation in the event they are required to verify that the distributions received are qualified to be excluded from income. Anyone involved in this benefit must discuss the tax consequences with their own tax attorney or CPA.
Under the lien approach, payment of an accelerated death benefit reduces the cash surrender value and death proceeds. And again, this is very similar to the way a whole life insurance policy loan functions. However, the face amount is not reduced by the lien; and premiums and dividends continue based on the full face amount. Accelerated benefit payments may be limited by both the total lien limit and the maximum annual lien limit. The cash value and the net amount to risk of the base policy and paid-up additions (including dividend additions and rider additions) may be taken as an accelerated benefit. This is called the total lien amount and it depends on which qualifying triggers are satisfied. In the case of a chronic illness, the insured age when the benefit is first exercised may affect the limit.
For example, under a terminal illness, a given percentage of the net amount at risk may be available at any age. However, under a chronic illness, a percentage of the net amount to risk available may be a level percentage up to a certain age and then start to slowly increase as one enters their late ’60s and ’70s and beyond. Under a chronic illness, the net amount at risk percentage available may be locked in at the time of the first claim at the insured’s then attained age.
Assume a whole life insurance policy has a base policy face amount of $250,000 and a paid-up additions face amount of $100,000. Also, assume the base cash value is equal to $104,000 and the whole life insurance policy’s paid-up additions cash value is equal to $73,000. If the age of onset of chronic illnesses is 72 and the percentage of net amount to risk available is 40 percent, then the total lien limit would be $246,200.
$177,000 + (0.4*($350,000 – $177,000)) = $246,200.
The above example shows the power of this rider in a whole life insurance policy. Where ordinarily the amount available in a chronic illness might be the total cash value or $177,000, here we have a situation where $246,000 is available because of the chronic illness triggers and waiting period was satisfied.
Once again, a chronic illness maximum annual lien limit is generally held to a maximum annual lien limit amount as specified by the IRS.
Administrative fees may be charged by insurance companies offering this rider.
Lien carrying charges are generally payable in advance for many amounts accelerated through a lien, similar to the way interest is charged on policy loans. The rates may differ if the lien is against the net amount at risk or the cash value.
If the accelerated benefit and lien carrying charges cause the policy to terminate prior to death, the contract is considered to be satisfied, not lapsed, with no further premiums required nor benefits due. When a whole life insurance policy is deemed to be satisfied, it should not be considered a taxable event.
[sc_content_link label=”Get the right insurance coverage.” cat=”life”]