A Living Benefits Rider, also commonly referred to as Accelerated Death Benefits, provides the policy holder with an early payout of their life insurance policy death benefit if they are diagnosed with a terminal illness. Most life insurance companies consider someone terminally ill when they are expected to live 12 months or less from the date of request for the benefit advance. With a living benefits rider the policy holder can access anywhere from 25% – 100% of the eligible proceeds, usually capping out between $250,000 – $500,000 depending on the insurance company. The payout is made to the owner of the life insurance policy instead of the beneficiary. If 100% of the policy face value is not accessed then the remainder remains in force as a death benefit on the policy.
It is important to keep in mind that many life insurance companies treat benefit advancements like a living benefits rider as a loan or lien against the life insurance policy. This means that interest will accrue on the amount paid out and be charged against the remainder of the face value of the policy. This, along with any fees the life insurance company charges, will reduce the remaining death benefit on the policy. If your life insurance company does not allow 100% of the face value of the life insurance policy to be paid out, this is probably why.
For most insurance companies the living benefits rider is available at no additional cost. It is merely an option that you need to be aware that your life insurance company offers, and alert them that you would like to add it to your existing policy. Depending on the insurance company, you might be able to elect the option at the same time that you furnish them with proof of a terminal illness. Insurers cannot dictate how the funds distributed from a living benefits rider are used. Once the money has been paid out it belongs to the owner of the policy to use as they see fit.
Since the living benefits rider is fairly new, it is unclear how the IRS will treat the payout. Currently life insurance death benefit payouts are non-taxable. However, the proceeds from a living benefits rider might be taxable.
There are other options besides the living benefits rider for terminally ill patients. Policy loan or policy surrender can be viable options for people with a permanent life insurance policy. These options are usually based on the cash value of the life insurance policy instead of the face value of the policy. This means that people with term life insurance policies will not find a benefit from these options. It also means that a living benefits rider will most likely pay more than either of these options.
A viatical settlement is another option. A viatical settlement is the sale of an existing life insurance policy to a third party for more than the cash surrender value of the policy but less than the net death benefit. This amount, agreed to by both parties, is paid out in a lump sum. The third party (the viatical company) then becomes the owner of the policy and continues to pay the premiums. Upon the eventual death of the insured the viatical company then receives the full death benefit. Viatical settlements are usually only an option for chronically ill or terminally ill patients with a permanent life insurance policy. A viatical settlement is typically not an option for term life insurance policies. A viatical settlement is more likely to take a higher percentage of the policy in fees than the interest and fees generated from a living benefits rider. For most people needing one of these options, a living benefits rider will be the best value.