(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.