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Accelerated Death Benefit (ADB) Riders for Long-Term Care

Health care costs are a growing concern. Costs are skyrocketing, and as the population ages, more and more seniors will need long term care in their lifetime. As of 2018, 52% of people who reach age 65 will require some kind of long-term care. Medicare covers medically necessary acute care, such as hospital visits and surgery, but it doesn’t cover most long-term care that provides assistance with things like bathing, dressing and feeding. If you or a loved one needs nursing home care at some point in their lives, how will you pay for that? These expenses can easily wipe out years of savings. Luckily, there are alternatives. 

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

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What is an Accelerated Death Benefit?

An accelerated death benefit may be used to help pay for long-term care. This is a rider you can add to your permanent life insurance policy and it allows the owner to receive a portion of the payout before they die. The accelerated death benefit is used when the owner of the policy is diagnosed with terminal or chronic illness. If you need long-term care as the result of having terminal or chronic illness, you can use the accelerated death benefit from the life insurance policy to pay for expenses of long-term care.

You’ll need a doctor to provide documentation to the insurance company, listing what terminal illness you have and how long you’re expected to live. If you must enter a nursing home and are expected to stay there until your death, the right accelerated death benefit rider will cover those expenses.

The accelerated death benefits are sometimes called living benefits of life insurance.

Accelerated Death Benefit for Terminal Illness

Once your doctor has diagnosed you with a terminal illness, you’ll receive the accelerated death benefit in one lump-sum payment, and you can use this money how you want. Typically, you’ll receive somewhere between 25% and 100% of the death benefit. If there’s any money left after the owner passes away, the beneficiaries will still receive the remaining death benefit. If the person recovers from the illness, they don’t have to pay the money back. You’re basically receiving the death benefit early.

Accelerated Death Benefit for Chronic Illness Rider

This may seem like much the same thing as a terminal illness rider, but insurance companies make a distinction. A chronic illness is an illness that prevents you from performing two out of six activities of daily living. These six ADL’s are:

  • Eating
  • Bathing
  • Getting dressed
  • Toileting
  • Continence
  • Transferring (getting yourself in and out of bed)

If you do become chronically ill, such as with Alzheimer’s, your insurance company could pay your claims with either rider, for terminal or chronic illness. 

Critical Illness Riders

This rider provides benefits if you are diagnosed with an illness the insurance company lists as critical, such as:

  • Kidney failure
  • Terminal cancer
  • Stroke
  • Heart attack

Critical illness riders are offered by fewer insurance companies than accelerated death benefits riders and they might have an additional cost attached. 

Are Accelerated Death Benefits Tax-Free?

These benefits are usually tax-free.  However, accelerated death benefit for terminal illness payouts are counted as income, even though they are not taxed as such. This could affect whether or not you qualify for Medicaid. 

Accelerated death benefits for long-term care can vary a little from company to company. Some will give you part of the death benefit if you are terminally ill only, whereas some will give you the death benefit if you need long-term care. Some companies cap the amount of the face value you can access, such as 50%. If you have a $500,000 policy, they may advance $250,000 to you to cover medical expenses, nursing home care, or visiting nurse care. 

Once you are given the lump-sum payment, the insurance company will reduce the death benefit accordingly, and adjust the premiums to reflect the new face value of the policy. 

You need to discuss carefully with your agents about these riders and how they work in each insurance company from which you are interested in obtaining a policy. If you need some consultancies on this topic prior to buying a permanent life insurance policy, you can also schedule a phone conversation with our licensed advisor.

>>MORE: Tax Benefits of Life Insurance: Compare With Other Retirement and Investment Options

How Much do Accelerated Death Benefit Riders Cost?

Some life insurance companies such as Symetra offer accelerated death benefit riders included in the life insurance policy itself, free of charge. However, some insurance company charge a nominal fee for these riders.

Long-term Care Insurance

This is similar to a long-term care insurance rider, although usually far more expensive. According the AARP, premiums for long-term care insurance average about $2,700 a year. You need to read a long-term care insurance policy carefully because they vary from company to company.

You’ll settle on an amount of long-term care insurance you want, and once approved, you’ll start paying the premiums. You won’t qualify for long-term care insurance if you already have a chronic or terminal condition. You might have difficulty just finding a company to sell you a policy—fewer than twelve companies offer long-term care insurance today, as opposed to over 100 companies that sold it in the 1990’s.

If your employer offers long-term care insurance as part of your benefits package, that can be a cost-efficient way to obtain long-term care insurance. They usually offer it at group rates, which are less expensive and easier to qualify for. 

One disadvantage of long-term care insurance is that it’s difficult to estimate how much you might need. Unlike with life insurance, if you pay for three years of long term care with an insurance plan and wind up not using any of it, you’ll have wasted the money you spent on the premiums. You can’t know you’ll definitely need nursing home care. Sure, many people do, but an almost equal number of people don’t.

Another disadvantage of long-term care insurance is that the payout may be taxable, depending on how the policy is structured. 

There are hybrid policies you can look into. These are a combination of long-term care insurance and life insurance. Unfortunately, these policies usually require a hefty upfront payment, so many people cannot afford them. 

A few states (Connecticut, California and Indiana) offer partnership for long term care programs. These are designed to protect some of your assets before Medicare pays for your long-term health costs. If you live in one of these states, this is definitely worth looking into.

What does an Accelerated Death Benefit Cover?

You can use your accelerated death benefits to cover things such as:

  • Nursing home care
  • Visiting nurses
  • Hospice
  • Debts

Hypothetically, you could use some of the money to enjoy your last bit of time with your loved ones such as by taking a vacation together, if you feel well enough.

Quaranteed and Permanent

Yes. Guaranteed Universal Life Insurance (GUL) provides the same guaranteed and permanent coverage for less than half the cost of Whole Life Insurance premiums.

Last Thoughts

Planning for long-term health care is difficult. Health care costs are expensive, and it is likely that you will need some kind of care as you age. An Accelerated benefits rider may be the easiest and least expensive way to plan ahead for this expense. That way, should you not need long-term care, your beneficiaries will enjoy a tax-free death benefit, so the money you spent on premiums will be well spent.

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