Don’t you love those rare moments when you buy something and then find out a bonus item comes free with the purchase? This happens with life insurance too. Most term life insurance policies automatically come with some free add-ons called riders. One of these riders we’re going to discuss today is called an accelerated death benefit rider.
What is an accelerated death benefit rider?
Not all term policies but most have an accelerated death benefit rider automatically included. An accelerated death benefit rider allows the policyowner to receive a portion of the death benefit early when the insured individual is diagnosed with a terminal illness resulting in a decreased life expectancy. Some carriers allow an individual to claim all of the death benefit. If a partial benefit payment is claimed, the life insurance policy can continue with a reduced death benefit and lower premiums. If the entire benefit is claimed, the policy is then terminated.
This rider is not advertised enough. Many individuals have an accelerated death benefit rider included in their policy and don’t even know about it. If you had one year or less to live, wouldn’t you like to know that you can immediately receive a portion of your policy’s death benefit to spend in any way you wish?
After a few weeks of not having an appetite, Jane Smith went to her doctor to get checked out. She was diagnosed with stage IV pancreatic cancer, which often is detected far too late. At stage IV, surgery is no longer an option. It’s a fast moving cancer and her doctor gives her eight months to live.
Jane has a $500,000 term life insurance policy through Banner Life. Banner Life’s term policy includes an accelerated death benefit rider and allows an individual to cash out up to 75 percent of the death benefit if you are diagnosed with a life expectancy of twelve months or less.
This gives Jane the option of taking up to $375,000 and using it in any way she wishes and it still leaves her beneficiaries approximately $125,000 (minus any processing fees, typically $150) upon her death.
Jane can use the accelerated benefit cash in any way she wants. Some common options include:
- Paying off medical bills
- Trying experimental treatments her health insurance would not cover
- Taking her family on a vacation
- Completing her bucket list
While they vary by the life insurance carrier, there are certain eligibility requirements that need to be met before this rider can be utilized. Requirements such as:
- The insured must have a terminal illness.
- The insured must have a life expectancy of six, twelve, or twenty-four months or less (not only does the carrier make a difference, but the state the insured lives in makes a difference as well.)
- Typically the policy must have been inforce for more than two years.
Accelerated death benefits are also known as “living benefits” since you are able to use portions of your policy’s death benefit while you are still alive.
Why is an accelerated death benefit rider automatically included on most policies?
Life insurance companies are not out to rip people off. They are in the industry to help those when they need it most, essentially, when death is on the horizon. Before these accelerated benefits were an option, desperate insured individuals began selling their policies to the highest bidder. Basically, someone with a terminal disease would sell his or her life insurance policy at a discount so they could have money to pay medical bills and what not and then when that individual died, the buyer would cash in the full amount of the policy. This arrangement is called a viatical settlement.
Let’s say it’s the year 1980 and Jane Smith has a $500,000 life insurance policy, but accelerated death benefit riders have not been thought up yet. She is diagnosed with stage IV pancreatic cancer and has been given eight months to live. She needs money to pay medical bills and would like to go on a vacation to enjoy the remainder of her life as much as she can.
John Doe agrees to purchase Jane’s $500,000 policy for $150,000 cash and will keep paying her premiums. He is basically investing into her short life expectancy. When Jane does die, John will receive the full $500,000 death benefit. Jane’s original beneficiaries receive nothing.
These viatical settlements were rare in the United States up until the late 1980s, when the AIDS epidemic peaked. Many terminally ill AIDS patients needed money for treatment. In 1993, the National Association of Insurance Commissioners (NAIC) developed the Living Benefits Model Act. In the creation of this act, it was suggested that insurers should be able to offer accelerated benefits to policyowners if they discover the policyowner plans on viaticating, or selling, his or her policy. It was, however, deemed unfair not to offer this option to all policyholders. It was then determined that these accelerated benefit options be added into contracts. This made it possible for insured individuals to use a portion of their policy’s death benefit when it was needed most without selling it off at a discount.
Most of the life insurance companies Quotacy works with include the accelerated death benefit rider automatically on their life insurance products. Some insurance companies forgo riders in order to make their process faster and premiums a little cheaper. When your policy is issued, it will state which riders are included. If you would like to know before you officially apply, you can ask your Quotacy agent if the policy you are interested in purchasing includes any riders. They will be happy to assist you in finding the policy that best meets your needs. You can start by exploring costs with our term life insurance quoting tool.
Photo credit to: Joey Kyber