Life insurance policies that include accelerated benefit riders provide several types of coverage to insureds during their lifetime. They pay benefits in addition to the traditional death benefit and cash value to policyholders who are chronically ill, critically ill or in need of long-term care if certain conditions are met.??
If you’re considering accelerated benefit riders, here’s what you need to know.
Key points to remember
- Accelerated Benefit Riders pay death benefits to life insurance policyholders during their lifetime.
- The benefits are paid to insured persons suffering from a chronic illness, a terminal illness or who need long-term care and meet certain conditions.
- Some endorsements can be purchased as an add-on, while others are included directly in a policy.
How Accelerated Benefit Riders Work
Also known as living benefits or accelerated death benefits, accelerated benefit riders allow policyholders to access the death benefits of their life insurance policy while they are alive, under certain conditions. Policyholders receive benefits to cover the costs of chronic illness, critical illness or long-term care, but are still entitled to the policy’s remaining cash value and death benefit. The payment ranges from 25% to 100% of the death benefit.??
In some cases, policyholders have a choice of how benefits are paid — they may receive either a lump sum or periodic payments, depending on the type of loss and benefit. A policy may also limit the total amount of benefits paid or require a minimum payment.??
Some endorsements can only be purchased at an additional cost, while others are built right into the policy. Although the old type of rider will cost the policyholder an additional initial charge in the form of a period charge, this type of benefit will pay the full amount stated in the policy.??
“No-cost” riders are simply riders that are paid at the time of claim, where the insurance company will discount the dollar amount of benefits that are paid to the policy owner according to a formula that takes into account the rates of. interest and mortality, as well as the amount of the cash value of the policy.??
Like many other types of insurance, expedited benefits can be paid either as reimbursements or as indemnities, with benefits going directly to providers or other parties requiring payment.
Expedited benefit extensions
Some policies also offer an Extended Benefit Rider which typically doubles the amount of accelerated coverage at an additional cost, but without the purchase of an additional death benefit. This rider effectively allows cost-conscious consumers to purchase a lower amount of death benefit while still maintaining adequate living benefit protection. Riders known as “tied benefits” can also provide coverage for long-term care (LTC) expenses that are at least two to three times the face amount of the policy.
Types of accelerated benefit riders
Here’s a more in-depth look at the Critical Illness, Chronic Illness and Long-Term Care Endorsements:
Serious illness riders
Critical Illness Endorsements pay a large portion of the death benefit to policyholders when they are diagnosed with a critical illness or sustain serious injury. This benefit is generally received in the form of a lump sum payment.??
Chronic disease riders
These riders pay a periodic benefit if the policyholder becomes incapacitated or disabled for an extended period. This type of endorsement is usually triggered when the insured becomes unable to perform at least two of the six activities of daily living, including eating, bathing, using the bathroom, dressing, moving around and continence.
Long Term Care Endorsements
Long-term care riders generally require a separate full underwriting for the insured, but provide more comprehensive coverage for long-term or retirement home expenses than chronic illness benefits. But it comes at a higher cost.
The benefits paid by accelerated benefit riders while you are alive mean that your beneficiaries will receive less when you die. Think of these riders as a prepayment.
Coverage of chronic care versus long-term care
It’s understandable that consumers are baffled by the separation between chronic illness benefits and long-term care, as the two seem to fall into essentially the same category. However, the life insurance industry requires that these two types of benefits remain separate.
Chronic illness riders are inherently more restrictive than long term care riders, and one of the main differences between the two is that to be eligible for the former, the insured must be permanently incapacitated. Chronic illness riders can also pay in a lump sum or on an annual basis, while long term care riders generally have a monthly payment. The cost of processing and managing chronic disease benefit claims is also generally less expensive than for long-term care riders, which means that the cost of chronic disease benefits is lower for consumers.
What to Consider Before Buying Accelerated Benefits
While living benefits can be a valuable addition to any life insurance policy, consumers should consider several key factors before purchasing them. Here are some of the issues that font owners face:
Impact on inheritance
If accelerated benefits are paid, the policy death benefit will be reduced for beneficiaries. Will the policyholder’s estate plan remain intact?
Separate coverage required
Accelerated Benefit Riders do not completely replace separate policies specifically designed to cover certain risks, such as disability or health insurance.
Expedited benefit payments may impact Medicaid eligibility. Income paid by accelerated runners is often counted as income for Medicaid, although applicants are not required by law to exhaust these benefits before they can be considered eligible.
In most cases, benefits are not subject to federal tax if a terminally ill or chronically ill person meets certain requirements. Under the federal tax code, for example, a terminally ill person is defined as having only 24 months to live.
Accelerated Benefit Riders vs. Viatic settlements
Do not confuse Expedited Benefit Riders with Asian settlements. Expedited benefit riders are essentially the modern equivalent of viatical settlements that terminally ill policyholders use to raise funds to pay their medical bills. Under these agreements, policyholders sell their policies to a third party settlement company for a percentage of the face amount of the policy. The policyholder appoints the settlement company as the beneficiary of the policy, and the company receives the death benefit after the policyholder’s death.
Also known as lifetime settlements, vii settlements generally earn the seller more than the cash value of the policy, but less than their death benefit.
The bottom line
According to Jason Kestler, president and CEO of Kestler Financial Group, headquartered in Leesburg, Va., Accelerated benefit riders have effectively provided consumers with a greater level of control over their insurance protection. “Clients are now able to start or stop an income stream from their policies when they have a qualifying need, and many endorsements now also provide a cost of living adjustment to keep up with inflation. ”
Market demographics, improved financial education, and rising healthcare costs and needs have made multi-line protection in a policy more attractive. But those who need specific types of protection against these unique vehicles should read the fine print and do their homework to understand if they will receive what they are really looking for and how much they will pay for it.