ALDOI – Questions and Answers on Accelerated Benefits

(also known as “living benefits”)

a: Accelerated benefits, also known as “living benefits,” are life insurance policy proceeds that are paid to the policyholder before they die. Benefits may be provided in the policies themselves, but are more often added through riders or attachments to new or existing policies.

Reading: In what way is a life insurance policy affected by an accelerated benefit

a: The accelerated benefits option or rider in a life insurance policy states that all or a portion of the policy proceeds will be paid to the insured when specified events occur. These include such things as a diagnosis of a terminal illness, a need for long-term care, or the onset of a disabling medical condition. the life insurance company will deduct the accelerated benefit payment from the death benefit it ultimately pays to the beneficiary.

a: Some insurers add accelerated benefits to life insurance policies for a small additional premium, usually calculated as a percentage of the base premium. however, a growing number of companies offer these benefits at no additional premium, but charge the policyholder for the option only if and when it is used. In most cases, the company will reduce the policyholder’s anticipated benefits prior to his death to compensate him for the interest he will lose on his advance payment. in addition, there may also be a nominal service charge.

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a: These options are usually added to universal life insurance policies or other permanent life insurance policies. some insurers are beginning to offer them with term life insurance policies sold to individuals. Accelerated benefits may also be available through group term or permanent life insurance policies. Accelerated benefits options are typically offered when you purchase a new life insurance policy, but many insurers will add them to existing policies as well.

a: Currently, more than 150 companies offer some type of accelerated benefits. in addition, other companies have indicated that they are developing such plans or are considering them. more than 3 million Americans are now protected by accelerated benefits.

a: Situations vary, but generally fall into one or more of these categories:

• terminal illness, with death expected within a specified period, usually six months to one year.
• the occurrence of a specific catastrophic illness or the need for an extraordinary medical intervention, such as an organ transplant, or the need for continuous life support.
• the need for long-term care due to the inability to perform a number of “activities of daily living” such as bathing, dressing, eating, etc.
• permanent placement in a nursing home.

a: Companies offer between 25 and 100 percent of the death benefit as an advance payment. the amount varies from policy to policy. for those policies in which accelerated benefits are added to the policy without additional premium, the insurer will reduce the advance payment to the policyholder so that he or she is compensated for the interest that will be lost in the advance payment. sometimes payments are made in monthly installments, other times in a lump sum. Some policies allow the policyholder to choose the payment method. each policy or annex specifies the available method.

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a: There are several important considerations, including these:

• People often buy life insurance to protect spouses and children in the event of death. A policyholder should consider how electing accelerated benefits will affect their survivors, for example, if the death benefit is fully described when an accelerated benefit is paid, there would be nothing left to pay to the beneficiary.
• Accelerated benefits are an option to consider when covering long-term care expenses or a catastrophic illness. but they are not a form of health insurance, nor are they intended to replace the need for comprehensive health insurance or long-term care.
• The Internal Revenue Service is clarifying the tax status of accelerated benefits. You should direct any specific tax questions to your accountant or other tax advisor.
• Collecting accelerated benefits may affect Medicaid eligibility. the us health care financing administration The Department of Health and Human Services has stated that policyholders cannot be required to apply for or collect accelerated benefits before qualifying for Medicaid benefits. but once accelerated benefits are elected, those funds could be considered income that could affect medicaid eligibility.

a: State insurance departments regulate accelerated benefits, as they do with all insurance products. all 50 state insurance departments and the district of columbia have approved the sale of some form of accelerated benefits. The National Association of Insurance Commissioners, an association of state regulators, has developed model rules that cover the sale of these benefits. The model regulations specify a series of qualifying conditions that can be used to trigger accelerated benefit payments. The model rules also limit the interest charges that some insurers deduct from accelerated benefits to compensate the insurer for its early payment.

a: A representative list of insurers offering accelerated benefits is available from the National Insurance Consumer Helpline, 800-942-4242. Although more than 150 companies offer some type of accelerated benefits, not all plans are approved in all states. nich cannot tell you if a particular plan is approved in a certain state. For more information, consult your professional insurance producer or the Alabama Department of Insurance.

a: Some terminally ill people have made what is known as a “viatical settlement” of their life insurance policy, a settlement not to be confused with accelerated benefits. In a viatical settlement, a company purchases the life insurance policy of a terminally ill policyholder and pays the policyholder between 55 percent and 80 percent, typically, of the death benefit. the viatical company becomes the beneficiary of the policy and receives the full death benefit when the insured person dies.

viatical settlement companies are not affiliated with or sanctioned by the life insurance industry. Some state insurance departments regulate viatical settlement companies, so you may want to consider contacting the Alabama Department of Insurance for more information. Also, contact your producer to find out if an accelerated benefit or policy loan is available to you as an alternative to a viatical settlement.

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