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Sample Article From the Encyclopedia

ACCELERATED DEATH BENEFITS, payment by an insurance company of part, or all, of a life insurance policy’s death benefits before the insured’s death in the event of certain qualifying events such as terminal illness. Availability of accelerated death benefits helps people who are facing death, life-threatening medical events, or confinement to a nursing home or extended care facility access to funds that would otherwise only be available to survivors. Familiarity with life insurance basics aids understanding of accelerated death benefits.

Normal Life Insurance Policy Benefits

An insurance company will pay the “face amount” (death benefit) of an in-force life insurance policy to the beneficiary when the insured dies. This is the case for all forms of life insurance, including term, endowment, whole life, universal life, and variable life. In term life policies, a promise to pay upon death while the policy is in force is the only policy benefit. In an endowment policy, the insurance company pays the face amount if the insured dies during the term of the endowment and also pays the face amount if the insured survives the policy’s term. For example, in an Endowment at Age 65 policy, the death benefit is paid if the insured dies before age 65 or when the policy matures as an endowment if the insured lives to age 65. Whole life policies are really endowment at age 100 contracts and will pay the death benefit to the beneficiary if the insured dies before age 100 or to the insured if he or she lives to that age. Universal life and variable life policies may extend death benefit protection beyond age 100.

All forms of life insurance other than term also have a savings, or cash value, element. In whole life or endowment policies, premiums are set so that the cash value equals the face amount of the policy at the end of the policy term. In universal and variable life policies, the cash value is determined by the level of premium payments and the interest or investment results. The policy owner can borrow from this cash value, creating a debt against the policy’s death benefit for the loan amount plus interest. Loans against life insurance policies do not have to be paid back but will be subtracted from the death benefit of the policy if not repaid before the insured’s death. In universal and variable life policies, the cash value can also be withdrawn. In all cases, the policy can be completely or partially surrendered to get the cash value, but then the accompanying death benefit is also lost. A policy owner who borrows against the cash value or makes a partial withdrawal, or surrenders the policy to get all of the cash value, may use the money for any purpose, including costs associated with poor health. An insured’s access to cash value is a “living benefit” available to the policy owner, often without incurring any income tax liability.

Other Living Benefits

Although funds provided under a life insurance policy’s accelerated death benefit (ADB) option are sometimes called “living benefits,” this term is also used to describe payments made by viatical settlement firms. A viatical settlement firm provides cash to terminally ill policy owners by purchasing their life insurance policies for some percentage of the death benefit. The less time the insured has to live, the higher the percentage. The firm then names itself as beneficiary, continues paying the policy premiums, and collects the policy proceeds upon the death of the insured. Viatical settlements (sometimes called “living settlements” or “senior settlements”) are available to virtually anyone who has owned a life insurance policy for at least 2 years and is expected to live less than 12 years.

Accelerated death benefit options have been developed by life insurance companies as an alternative to viatical settlements, although they are not mutually exclusive. In many cases, life insurance policies with accelerated death benefit provisions make a viatical settlement unnecessary, although accelerated death benefit provisions of life insurance policies are generally much more restrictive than viatical settlements.

During the late 1980s, Canadian life insurers introduced accelerated death benefit options to help terminally ill AIDS (acquired immunodeficiency syndrome) patients, and they have become an increasingly popular product of U.S. life insurers. Though the original intent was to help AIDS victims, the accelerated death benefit option can be an important living benefit to anyone facing the costs associated with a terminal illness or other debilitating condition.

The Accelerated Death Benefit Option

There are, generally, four situations in which a life insurance company will advance payment of some of the death benefits of an in-force life insurance policy: (1) diagnosis of a terminal illness where the remaining life expectancy is 6 months or one or two years; (2) permanent confinement to a nursing care facility; (3) inability to perform activities of daily living; or (4) onset of a dread disease, such as cancer. Virtually all (more than 90%) policies that make provision for accelerated death benefits will accelerate for short life expectancy. At the time of the 1998 American Council of Life Insurance and the Life Insurance Marketing and Research Association (ACLI/LIMRA) Accelerated Death Benefits survey, 73% of companies offering ADB for terminal illness set the requirement at an expectation of death within 12 months. Now more use the definition of a terminally ill individual found in the Health Insurance Portability and Accountability Act (HIPAA) of 1996—someone “who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death in 24 months or less from the date of certification”—as qualification for the benefit. When exercised due to terminal illness, the ADB payment typically is determined by discounting some or all of the death benefit. In most policies, some type of medical certification that a qualifying event has occurred must be provided to the insurer before the option may be exercised.

The ADB option is becoming an increasingly popular feature of life insurance policies. According to the 1998 survey by ACLI/LIMRA, the number of ADB option policies increased from about 1.13 million to at least 39.9 million from 1991 to 1997, and the number of insurers offering this feature increased from 113 to 245 during this same time period, despite the fact that the number of active life insurance companies dropped by 25% from 1994 to 1997. More employers include the ADB option as part of group life plans, given the low cost of providing this popular benefit to employees.

Terms of ADB options vary from insurer to insurer and can be offered as a feature of a new policy, added as a rider to an existing one, or made available by policy endorsement or administrative practice. Depending on policy terms and state laws, the maximum amount that can be accelerated ranges from 25% to 100% of a policy’s face value. Often, minimum policy size and maximum benefit limitations are also imposed by companies. The policy owner may receive an ADB payment as a lump sum or in monthly installments, and no restriction is made on the use of such funds. In some policies, the ADB payment becomes a lien against the policy’s death benefit, in which event access to the policy’s cash value may be restricted by the amount of the lien.

Costs of ADB options also vary. Although some insurers charge an additional premium for the ADB option, many ADB policies do not carry an additional charge unless the option is exercised. Some insurers charge no additional premium for this feature. When the option is exercised, the insurer may charge a percentage of the policy’s face value, an administrative fee, or both. Typically, the fee charged offsets interest lost by the insurer in paying the death benefit earlier than actuarially anticipated.

Prudential Insurance Company of America, in 1990, was the first major U.S. insurer to offer the ADB option and is among the top insurers in the nation in terms of ADB claims paid. From 1990 to 1994, Prudential paid more than $55 million on 680 claims for ADB payments, an average payment of more than $80,000 per claim (Armstrong 1994). About one-half of these payments went to cancer patients, about 27% went to AIDS victims, about 12% went to heart patients, and the remainder went to those diagnosed with other terminal illnesses. Under the Prudential ADB policy, insureds may accelerate up to 90% of the policy’s face value if they are diagnosed with a terminal illness, and up to 70% or 80% of the policy’s face value if they are confined to a nursing home.

ADB policies have been criticized on the grounds that this feature defeats the purpose of life insurance and usurps funds necessary to provide for family members after the insured’s death. Unrestricted access to these funds, it can be argued, may save or prolong the life of the insured, which may not be in the best financial interests of the insured’s dependents. As a result, many state laws limit the amount of the death benefit that may be accelerated and paid to the insured. Conversely, acceleration of the entire death benefit permits more of the insured’s medical bills and other expenses to be paid prior to death, leaving more of the insured’s other assets available to meet the needs of family and dependents.

Prior to January 1, 1997, uncertainty surrounding how accelerated benefit payments should be treated for income tax purposes was a major obstacle to their wider acceptance. Although life insurance proceeds usually are not taxable to the beneficiary, it was unclear whether receipt of an accelerated payment of the death benefit to the policy owner would be subject to income taxation. The Health Insurance Portability and Accountability Act of 1996 answered that question in the negative, effective on the first day of 1997, and both accelerated death benefit payments and viatical settlements are excluded from income for tax purposes if the insured is either a “terminally ill” or “chronically ill” individual. Terminally ill means that the insured can be reasonably expected to die within two years. Chronically ill means that an insured cannot perform at least two out of six activities of daily living without substantial assistance or requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Any policy owner who wishes to exercise the ADB option should consult a tax attorney or financial advisor prior to doing so. Life insurance policies with the accelerated death benefits option offer a feasible, compassionate response to financial problems brought about by the onset of terminal illness.

(See also ACTIVITIES OF DAILY LIVING, [ADLs] DEATH BENEFITS; ELDER LAW PRACTICE; FINANCIAL ADVISORS; LIFE INSURANCE; LONG-TERM CARE INSURANCE, PRIVATE.)

Organizations

• American Council of Life Insurers
• LIMRA International
• Viatical Life Settlement Association

Suggested Reading

• Wolk, Gloria Grening. 1997. Cash for the Final Days. Laguna Hills, CA: Bialkin Books.
• Shilling, Dana. 2000. Financial Planning for the Older Client. 5th ed. Erlanger, KY: National Underwriter.

References

• American Council of Life Insurance (ACLI) and LIMRA International. 1998. Accelerated Death Benefits Washington, DC: ACLI.
• American Council of Life Insurance (ACLI). 2002. Life Insurer’s Fact Book 2002. Washington, DC: Author.
• Armstrong, Sean. 1994. “AIDS and the Trusted Advisor: Accelerated Life Insurance Benefits for the Terminally Ill Patients.” Best’s Review—Life Health Insurance Edition. Oldwick, NJ: A.M. Best.

Authors

• Stephen L. Poe, John H. Thornton, and Kennes C. Huntley
• Updated by E. Craig MacBean