Accelerated term life insurance, sometimes referred to as term life insurance with accelerated living benefits, is a little known life insurance provision that could be a godsend at a very difficult time in life.
Though we normally think of life insurance as payable only at the time of death, this is a provision that enables you to access part, most, or even all of your death benefit while you’re still alive.
Interested? You really should be.
What is accelerated term life insurance?
As is the case with all term life insurance policies, the basic life insurance provision will pay you a death benefit, and will remain in force for anywhere from five years to 30 years.
The accelerated living benefits rider enables you to collect a portion of your death benefits if you experience certain health conditions. Those conditions usually relate to terminal illness, chronic illness, or confinement to a nursing home.
For example, let’s say that you have a term life insurance policy with a $250,000 death benefit. If your doctor determines that you have a terminal illness, it’ll provide you with financial resources to deal with your illness while you’re still alive.
As you can probably guess, the advanced portion of the death benefit will reduce the amount received upon your death. Following the example above, you might receive $50,000 upon the determination of your illness, while your beneficiaries will receive the remaining $200,000 at the time of your death.
Conditions that will trigger the accelerated living benefits
Since life insurance policy riders are unique to each insurance company, the specific triggering events will vary depending on the company.
But generally speaking, the accelerated payment is triggered upon the determination that you have a qualifying terminal illness, and don’t expect to live more than two years (or less depending on the company issuing the policy).
The acceleration may also occur if you have a qualifying chronic illness that requires nursing home care. This is generally determined by whether or not you can do the Activities of Daily Living, or ADLs, which include the following six activities:
- Bathing—The ability to clean oneself and perform grooming activities like shaving and brushing teeth.
- Dressing—The ability to get dressed by oneself without struggling with buttons and zippers.
- Eating—The ability to feed oneself.
- Transferring—Being able to either walk or move oneself from a bed to a wheelchair and back again.
- Toileting—The ability to get on and off the toilet.
- Continence—The ability to control one’s bladder and bowel functions.
You may also qualify for accelerated living benefits if you develop a critical illness. These can include blindness, paralysis, heart attack, stroke, cancer, end-stage renal failure, ALS, or an organ transplant.
How an accelerated term life insurance policy works
Insurance companies will pay a living benefit of 50-100 percent of the death benefit on your policy.
However, the rider may limit how much money you can take from the policy in any given year. For example, you may be limited to no more than 20-25 percent of the death benefit in a year.
There may also be different benefit payouts based on the nature of the qualifying event. For example, the rider may spell out certain terms for the determination of a terminal illness, and another set of terms for nursing home care. While a policy may pay up to 90 percent of the face value for a terminal illness, it might limit the amount for nursing home care to 80 percent.
Accelerated term life costs and tax considerations
Many life insurance companies will enable you to add the living benefits rider to your policy free of charge. And the proceeds from the accelerated living benefits are tax-free when paid to you.
You will, however, have to continue making payments on your term life insurance even after receiving accelerated benefits, in order to keep it in force, just as you normally would.
Should you add an accelerated term life insurance rider to your policy?
If you can add a benefit acceleration rider to your policy for free, then you should consider doing so. As grim as it seems, you never know what might happen in the future.
You can use the proceeds to pay for nursing care, whether in-home or in a facility. Or the proceeds can be used to pay medical bills that health insurance doesn’t cover.
One strategy that’s highly advisable if you do add the rider, is to increase the total amount of your coverage. For example, if you decide that you need a death benefit of $250,000, increase that to $350,000. That will enable you to take $100,000 as a living benefit, while still leaving $250,000 available for your beneficiaries.
Already have a term life insurance policy? Check with your insurance company and see if the rider can be attached to your policy. If you’re shopping for term life insurance, tell the company that you want to add this provision to your policy.
Summary
With most accelerated term life insurance riders being free of charge, anyone looking to get a term life insurance policy, or who already has one, should seriously consider the addition. The rider can save you from expensive medical bills if you’re diagnosed with a terminal illness or require nursing home care.