Accelerated Death Benefit

A terminally ill insured who needs cash now may access part of the death benefit through:

1. A.A guaranteed insurability riderGrants the right to buy more coverage later. It releases no money and would do nothing for someone who needs cash today.
2. B.A free-look refundAvailable only on a brand-new policy, and it returns premium while ending the coverage. It is not a route to the death benefit of an in-force contract.
3. C.An accelerated death benefitCorrect - a living benefit for terminal illness.
4. D.A child term riderCovers the owner's children. It provides no way to release funds to a terminally ill adult insured.

Why: An accelerated death benefit (or a viatical settlement) provides funds to a terminally ill insured before death.

An accelerated death benefit rider generally lets a terminally ill insured:

1. A.Skip premiums permanentlyExcusing premiums during disability is the waiver of premium rider. An accelerated death benefit pays money out of the existing death benefit rather than changing what the owner owes.
2. B.Change the insuredThe insured is the life the contract is built on and cannot simply be swapped out under this rider. Acceleration changes the timing of the payout, not whose life is covered.
3. C.Double the death benefitDoubling on a triggering event describes an accidental death benefit, not acceleration. An accelerated payment is an advance against the benefit already in force, so whatever is paid early reduces what the beneficiary later receives.
4. D.Access part of the death benefit earlyCorrect - early access for terminal illness.

Why: An accelerated death benefit lets a terminally ill insured access part of the death benefit early, usually income-tax-free if qualifying.

An accelerated death benefit rider generally:

1. A.Is always fully taxablePayments that meet the terminal-illness requirements are generally received income-tax-free, the same treatment the death benefit would have received. The word always is the giveaway.
2. B.Increases premiums after a claimAcceleration is settled out of the death benefit, not by repricing the contract. Any amount advanced reduces what the beneficiary later collects, which is how the insurer is made whole.
3. C.Cancels the policyBecause the rider usually advances only part of the face amount, coverage continues for the remaining balance. The policy terminates only if the entire death benefit has been paid out.
4. D.Pays part of the face early for terminal illness, usually tax-freeCorrect - living benefit for terminal illness.

Why: An accelerated death benefit rider pays a portion of the face amount for a qualifying terminal illness, usually income-tax-free.

A physician certifies that an insured has a terminal illness expected to cause death within 24 months. She accelerates 60% of her $500,000 face amount under an accelerated death benefit rider. For federal income tax purposes, the $300,000 received is:

1. A.Tax-free only if used to pay medical billsWrong. No use-of-proceeds requirement applies to the terminally ill.
2. B.Taxable as ordinary income because she is still aliveWrong-but-tempting. The statute expressly treats these as death proceeds despite the insured living.
3. C.Excluded from gross income like a death benefitCorrect. Sec. 101(g) extends the death-benefit exclusion to terminal-illness accelerations.
4. D.Taxable to the extent it exceeds premiums paidWrong. Basis recovery math applies to surrenders, not terminal accelerations.

Why: IRC Section 101(g) treats amounts accelerated for a terminally ill insured as amounts paid by reason of death, excluding them from gross income. Citation: IRC Sec. 101(g)(1). Takeaway: terminal-illness accelerations are tax-free.