If you have a serious illness, however, a common policy feature known as an accelerated death benefit rider may help you cover medical bills and other expenses while you're still alive. It's also known as a "living benefit rider" or "accelerated living benefits rider," and it can help you get through a difficult time.

What’s an accelerated death benefit?

If you are sick, an accelerated death benefit, or ADB, allows you to access a portion of your life insurance policy's payout sooner. This feature is intended to help you cover expenses such as medical bills or the cost of care, but you can usually spend the money however you see fit.

The eligibility rules for an accelerated death benefit differ between insurers. You'll typically need to demonstrate that you have a terminal illness with a life expectancy of 24 months or less.

In these cases, some insurers will also allow you to apply for accelerated death benefits:

• You've been diagnosed with a critical or chronic illness that could shorten your life. Cancer, heart disease, stroke, kidney failure, coma, paralysis, and amyotrophic lateral sclerosis, or ALS, are all commonly covered.
• You have a catastrophic illness that necessitates extraordinary care, such as an organ transplant or life support.
• You require long-term care because you are no longer capable of performing two or more "activities of daily living" on your own. Bathing, eating, getting dressed, going to the bathroom, changing positions, and controlling your bladder or bowels are all examples.
• You’re permanently confined to a nursing home. If you have been in a nursing home for six months and are expected to remain there, you may be able to access your policy's payout, depending on your insurer.

Do I have to pay for accelerated death benefits?

Most insurance companies include accelerated death benefits for terminal illnesses as a standard feature in their policies, so there is no additional cost.

Some insurers offer catastrophic and critical illness benefits, as well as long-term care, as optional life insurance riders, which means you'll pay a higher premium if you add these to your coverage. The cost varies depending on the insurer.

If you use the accelerated death benefits, your insurer will almost certainly charge you an administrative fee. The fee will be deducted from the amount you are due.

If you have an older policy, see if your life insurance provider has added an accelerated death benefit to your coverage. Over the last few years, many insurers have added this rider to existing policies at no cost.

How much money can I collect early?

The amount you can access is determined by your insurer, the face value of your policy, and the state you live in. According to the American Council of Life Insurers, most insurers allow you to withdraw 25% to 95% of the death benefit.

If you have permanent life insurance, your insurer will deduct any outstanding loans from the death benefit. When your claim is approved, you will typically be paid in one lump sum.

What to know about accelerated death benefits

While accelerated death benefits are beneficial in many situations, they do have some disadvantages.

They might affect your eligibility for Medicaid and Supplemental Security Income. These government assistance programmes are available to low-income Americans, and the lump sum from an accelerated death benefit could significantly alter your financial situation. If this is the case, you may no longer be eligible for government assistance. Before making any decisions, consult with your caseworker or a financial advisor.

Your intended beneficiaries will receive less money. Because accelerated death benefits are deducted from your policy's death benefit, your life insurance beneficiaries will not receive the full amount of money if you die. If you want to ensure that your loved ones have enough money to cover the mortgage or other living expenses, you can choose to take a lower percentage of the payout early — say, 50% of your death benefit rather than 80%.

The tax law isn’t clear-cut. When you receive accelerated death benefits, you must report them to the Internal Revenue Service. Your insurer will send you form 1099-LTC, which will show the total amount paid to you. The payment is usually tax-free, but there are some exceptions. For example, if you choose to receive the ADB payment in installments rather than a lump sum, the interest may accumulate and be taxed as income.

They do not take the place of health or long-term care insurance. ADBs can assist in paying for expenses that are not covered by health or long-term care insurance. However, because they do not provide comprehensive coverage, they cannot be used in place of those policies.

Is an accelerated death benefit rider worth it?

While this rider has limitations, it can assist you in getting your affairs in order and alleviating financial stress for you and your loved ones while you are ill.

If your insurer includes an accelerated death benefit, you have nothing to lose by accepting it. If you must purchase it as an add-on, consider the cost and implications before making a decision.

If you have enough savings to cover unexpected medical bills and expenses, you could forego the rider.

Alternatives to consider

While it may be reassuring to know that you can access your life insurance policy if you become ill, accelerated death benefits aren't for everyone. Instead, consider the following alternatives:

• Use the cash value of your permanent policy. If you've had cash value life insurance for a while, you may have accumulated enough cash to borrow against it. If you decide you no longer require coverage, you can surrender your policy and receive cash. In any case, those funds could help you pay for your medical and living expenses.
• Consider investing in long-term care insurance. Long-term care insurance may kick in if you become chronically or terminally ill, allowing you to avoid using your life insurance or savings. It pays for long-term care expenses such as a nursing home, skilled nursing facility, adult day care, or a health aide for in-home care for up to a lifetime.
• Investigate a life insurance settlement. You may be able to sell your life insurance policy if you are 70 or older. Brokers typically handle these transactions, and universal life insurance policies are the most popular purchase.