Life insurance is a misnomer because it is typically only paid out after your death. Yet, there are some cases in which life insurance benefits can be paid out while the insured is still alive. One of these situations is with accelerated death benefits.
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Accelerated death benefits is a rider which is attached to your life insurance policy. Under the terms of the accelerated death benefits, your beneficiary will be entitled to all or part of your benefits if you become terminally ill. These benefits figure became available in the late 1980s with the AIDs epidemic but have now expanded to include many other terminal illnesses, such as late-stage cancers. Your beneficiary may also be entitled to accelerated death benefits should you become confined to a nursing home or will die without intensive care.
As expected, there are some strict clauses in the accelerated death benefits, such as the diagnosis, the length of prognosis, and whether the illness is incapacitating. There is no standard form for accelerated death benefits and only about 200 insurance companies currently offer the coverage. In some cases, the life insurance company may offer the benefits with their standard coverage but most will make you pay an additional premium for the rider.
Before you choose a life insurance policy with accelerate death benefits, consider whether it will affect your Medicaid benefits. The accelerated death payouts could be considered as income and thus change whether you are eligible for Medicaid. The accelerated death life insurance benefits could also be taxable and create difficulties for your beneficiary.
If you are worried about providing for your loved ones or paying expenses in event of a serious medical problem, you should be aware that there are also other life insurance options available to you which can be paid out before death. With critical illness life insurance, you get paid a lump, tax-free sum in the event that you develop a critical illness. Each insurance company defines critical illness differently but the major, debilitating illnesses are usually covered, like cancers and strokes.
Critical illness coverage is a separate life insurance policy whereas accelerated death benefits are a rider in your main life insurance policy. Critical illness coverage also gets paid out in full whereas usually no more than 80% of the accelerated death benefits will be paid out. Critical illness life insurance is also more likely to cover a wider range of medical problems, not just the conditions which are terminal or leave you completely debilitated. However, critical illness insurance will cost more than the accelerated death benefits rider.
Just because your life insurance company doesn’t directly offer accelerated death benefits, don’t refrain from asking about them. You may be surprised at how little is can cost to add the rider to your life insurance policy and give yourself a piece of mind should you become terminally ill.