Questions and Answers on Accelerated Benefits

(Also Known As "Living Benefits")

Q: What are accelerated benefits?

A: Accelerated benefits, also known as "living benefits," are life insurance policy proceeds paid to the policyholder before he or she dies. The benefits may be provided in the policies themselves, but more often they are added by riders or attachments to new or existing policies.

Q: How do they work?

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

Q: How are the benefits paid for?

A: Some insurers add accelerated benefits to life insurance policies for a small additional premium, usually computed as a percentage of the base premium. A growing number of companies, however, 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 benefits advanced to the policyholder before death to compensate it for the interest it will lose on its early payout. In addition, there may also be a nominal service charge.

Q: What kinds of policies have accelerated benefits?

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 group permanent life insurance policies. Accelerated benefit options are usually offered when you purchase a new life insurance policy, but many insurers will also add them to existing policies.

Q: How many insurance companies offer accelerated benefits?

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.

Q: Under what circumstances could a policyholder collect these early payments?

A: The situations vary, but they usually 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 specified catastrophic illness or the need for extraordinary medical intervention, such as an organ transplant, or the need for continuous life support.
The need for long-term care due to an inability to perform a number of "activities of daily living," such as bathing, dressing, eating etc.
Permanent nursing home confinement.

Q: How much of the face value of a policy can be collected early, and how is it paid?

A: Companies offer anywhere from 25 to 100 percent of the death benefit as early payment. The amount varies from policy to policy. For those policies where accelerated benefits are added to the policy with no additional premium, the insurer will reduce the early payment to the policy holder so it is compensated for the interest it will lose on the early payout. Sometimes, payments are made in monthly installments, at other times in a lump sum. Some policies allow the policyholder to choose the method of payment. Each policy or rider specifies the method available.

Q: What should one be aware of when considering such a life insurance policy or rider?

A: There are several important considerations, including these:

People usually buy life insurance to protect spouses and children in the event of their death. A policyholder must consider how electing accelerated benefits will affect his or her survivors, For instance, if the death benefit is depicted entirely when an accelerated benefit is paid, there would be nothing left to be paid to the beneficiary.
Accelerated benefits are one choice to be considered when providing for the expenses of long-term care or a catastrophic illness. But, they are not a form of health insurance, nor are they intended to replace the need for comprehensive health or long-term care insurance.
The Internal Revenue Service is clarifying the tax status of accelerated benefits. You should direct any specific questions you have about taxes to your accountant or other tax adviser.
Collecting accelerated benefits may affect eligibility for Medicaid. The Health Care Financing Administration of the U.S. Department of Health and Human Services has stated that policy holders cannot be forced to request or collect accelerated benefits before qualifying for Medicaid benefits. But once accelerated benefits are elected, those funds could be considered income that might affect eligibility for Medicaid.

Q: How are accelerated benefit plans regulated?

A: State insurance departments regulate accelerated benefits, as they do 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 regulations covering the sale of these benefits. The model regulations specify a number of qualifying conditions that may be used to trigger the payment of accelerated benefits. The model regulations also limit the interest charges some insurers deduct from the accelerated benefits to compensate the insurer for its early payout.

Q: How can you find life insurance companies that offer accelerated benefits?

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

Q: How do accelerated benefits compare to "viatical settlements"?

A: Some terminally ill people have made what is known as a "viatical settlement" of their life insurance policy -- an arrangement that should not be confused with accelerated benefits. In a viatical settlement, a company buys the terminally ill policyholder's life insurance policy, paying the policyholder 55 to 80 percent, typically, of the death benefit. The viatical company becomes the policy's beneficiary, 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. A few state insurance departments regulate viatical settlement companies, so you may want to consider contacting the Alabama Department of Insurance for further 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.

October 10, 2008