How the accelerated death benefit rider in life insurance works

Life insurance is a way to financially protect loved ones after you die. But unwelcome surprises, like the diagnosis of a terminal illness or other serious medical condition, can be costly—financially and emotionally. Certain policy features, like an accelerated death benefit rider, can help provide financial assistance in these situations. Here's how it works.

An accelerated death benefit rider, or terminal illness rider, is a provision that allows you to access part or all of your life insurance death benefit under certain conditions, The rider is typically automatically included on life insurance policies.

The conditions to use the accelerated death benefit vary by contract, insurance provider and state, but typically require being diagnosed with a terminal illness with a likely life expectancy of 12-24 months, as certified by a physician.

The accelerated death benefit is considered a "living benefit" since you can access the money while you're alive. Here are some answers to frequently asked questions:

Insurers generally don't place restrictions on how you can use the proceeds. You may put them toward care expenses like medical bills and caregivers, which could otherwise create a financial burden for your family. Alternatively, you could use the money to pay off debts or even to fund one last, special trip.

Accessing the accelerated death benefit may reduce or eliminate the amount of insurance, so your beneficiaries may receive a smaller death benefit, or none at all, when you die. It also decreases the contract's cash value, which can be problematic if you're using that money to supplement your family's income.

Also, receiving the early payment may affect your eligibility for Medicaid or other public assistance programs.

Possibly. Tax laws about the provision are complex; it may be taxable in limited situations. In addition, if you pass away while receiving the benefit, your beneficiaries may owe taxes on the payment. Speak with both your financial advisor and tax advisor about the potential tax implications of activating the benefit.

Your contract typically specifies how much of your death benefit you can accelerate, either in terms of a dollar amount or a percentage of eligible coverage. You may be able to receive the benefit as a lump sum or in installments.

Notably, the amount you receive may be lower than the amount you request. The insurer may reduce the payout based on considerations like life expectancy and the interest it may lose due to the early payment. There may also be an administrative fee.

Your contract terminates if you request the entire available amount. If you opt for only a partial acceleration, the contract remains in force but the amount of insurance, loan amount and cash value are reduced. Your new premium or cost of insurance is determined based on the reduced amount of insurance.

If the time comes when you're facing such challenging circumstances, the accelerated death benefit can serve as the financial lifeline you need to get through.

Do you have additional questions about the accelerated death benefit? Talk with your financial advisor.