Of all of the “riders” available to add to your life insurance policy, the accelerated death benefit rider may be the most important. The great news is that most every life insurance company in the country includes this rider as a free benefit.
As previously discussed, a life insurance policy rider is an extra benefit that can be added to any life insurance policy at the time of application to provide additional benefits.
While most companies offer the accelerated death benefit rider free of charge, some companies require you to select that you want to add this rider the time of application. When applying for any life insurance policy, make sure that your agent indicates on the application that you want the accelerated benefit rider.
How Does the Accelerated Benefit Rider Work?
The accelerated benefit rider, also called a “living needs rider” or a “terminal illness rider”, is designed to provide living benefits to a policy owner in the event that the insured becomes terminally ill. Each life insurance company has its own version of the terminal illness rider but they all work similarly. If the insured, the person covered under the life insurance contract, is diagnosed with a significant medical condition that is determined to be terminal by a physician, the policy owner can apply for accelerated death benefits up to certain limits established by the insurance company.
For example, let’s say that a 65 year old who owns a $500,000 life insurance policy with XYZ Life Insurance Company is diagnosed with stage 4 liver cancer and has been given less than a year to live by his doctor. If the policy contains an accelerated benefit rider, XYZ Life may allow for a percentage of the death benefit ($500,000) to be accessed prior to death of the insured. So XYZ Life actually pays out a portion of the death benefit to the policy owner in advance of the death of the insured.
In this case, to process a claim for the accelerated benefits, XYZ Life would require the policy owner to submit a Claim Form for the living needs benefit which would ask for specific medical details regarding the insured’s illness. Along with this information, XYZ would obtain the actual medical records of the insured as well as a statement in writing from the treating physician that diagnosed the terminal illness. Once all of the medical information is gathered, the “accelerated benefit claim” is reviewed and either approved or rejected based on the findings.
In this hypothetical example, if the claim is approved, XYZ Life may allow for up to a maximum of 50% of the policy death benefit or a maximum of $300,000 in actual benefits (whichever is lower). The funds are paid out to the policyowner in the form of a loan against the policy’s face amount and the balance is retained as a residual death benefit. The loan accrues interest while the insured is living and is deducted against the remaining death benefit at the insured’s death. At that time, the balance is paid out to the designated beneficiary.
The accelerated benefits can be used at the policy owner’s discretion. Commons uses of funds are to cover health care costs, purchase specialized health treatments, pay off debts and for estate planning purposes.