What is Accelerated Death Benefits and Terminal illness Coverage?

The financially debilitating effects of diseases such as AIDS, combined with continuing medical advances and increases in life expectancy, have focused individuals’ attention to the possibility of incurring significant end-of-life expenses. The individual may have adequate life insurance, and the life insurance may have cash values. However, the promise to pay the face amount on the insured’s death may offer little solace at a time when major expenses are being incurred. The cash surrender value could be helpful because it could serve as collateral for a policy loan, but the total loan will be limited to the policy’s surrender value, which itself may be minimal in comparison to the face amount. If the insured is expected to die within a short time period, the actuarial value of the death benefit promise under the policy will be greater than its cash value, and will be quite close to the face amount. If death is expected within a matter of months. Vertical settlement firms purchase life insurance policies from individuals who have been diagnosed with terminal illnesses, thereby possibly providing the individual with needed funds. Within the past few years, life insurers themselves have recognized the need to advance a portion or all of what is expected to be a death claim within a short time period. Many life insurance policies issued today allow such an acceleration of death benefits.
Accelerated Death Benefit provisions (or riders) involve the payment of all or a portion of a life insurance policy’s face amount prior to the insured’s death because of some specified, adverse medical condition of the insured. Such coverage also referred to as living insurance. A U.S. insurer is said to have offered the first such coverage . Jackson National Life is believed to be the first U.S. insurer to market the benefit successfully, although the Prudential (United States) gets credit for making the benefit popular when, it extended the coverage to all of its insured’s at no additional cost. The benefit was first introduced in South Africa and in the United Kingdom.
Terminal illness Coverage
Many insurers offer some type of terminal illness coverage that provides that a specified maximum percentage (typically 25 to 50 percent) of the life policy’s face amount can be paid if the insured is diagnosed as having a terminal illness. Some companies will permit acceleration of the full policy face amount. Most provisions require that the insured have a maximum of either six months or one year to live. The insurer requires satisfactory evidence that the insured suffers a terminal illness, including (1) certification by a physician, (2) hospital or nursing home records, and, possibly, (3) a medical examination (paid by the insurer). Many companies make no explicit charge for the coverage because they believe that they can absorb the costs of prepaying a portion of what would be certain, soon death claim anyway. However, some companies assess an administrative expense charge (e.g., up to $200) for processing the request and may reduce the amount payable to reflect lost interest. The benefit may be included in any type of policy. Insurers typically provide for a maximum total living benefit payout (e.g., $250,000), irrespective of how large the policy’s face amount may be. Also, they usually stipulate a minimum proportion (e.g., 25 percent) or amount (e.g., $25,000) that may be accelerated. A concern of many companies is that an unlimited benefit amount may create moral hazard in the form of more fraudulent claims. It is not unusual for the insurer to secure a release from all interested parties (e.g., beneficiary and assignee), not just the policy owner, to avoid any future misunderstanding. Of course, the decision to exercise the right to accelerate a policy’s payments will affect other policy benefits and values. Remaining death benefits, premiums, cash values, and dividends are reduced proportionately. Thus, if a policy owner applies to accelerate 50 percent of the policies face amount and if the insurer finds that the insured meets the conditions for acceleration, future premiums, cash values, death benefits, and dividends will be reduced by one-half.