Tap your own life insurance death benefits

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Death benefits from life insurance policies are usually left behind for your loved ones, but there are times when you may need the money yourself. Some plans allow policyholders in certain circumstances to access their own death benefits while they’re still alive, though it can be tricky and costly. Here’s what you need to know about taking what are formally known as “accelerated death benefits.”

How to buy life insurance

Early death benefits? Check your policy

Most life insurance policies are fairly straightforward: You buy a policy, make regular payments, and when you die, the beneficiary gets the value of that policy. The problem comes when policyholders run into end-of-life health issues for which death-benefit money could come in handy.

Enter the early death benefit. Provisions built into certain term and permanent life insurance policies, or otherwise available as add-ons, allow plan holders to dip into their death benefits to offset costs associated with chronic or terminal medical conditions, severe disabilities or long-term care.

Generally, anywhere from 25 percent to 95 percent of the death benefit can be accelerated, according to the American Council of Life Insurers, a trade group in Washington, D.C. How much you can withdraw depends on the terms of your contract and any limitations set by your state’s insurance department.

“One of the biggest reasons for bankruptcy is medical expenses for people because they don’t have the cash and the assets,” says Marvin Feldman, CEO of the Life Foundation, a nonprofit in Arlington, Va., that educates consumers on life insurance issues. “Accelerated death benefits in life insurance offer a superb way to help defray those expenses without causing monetary difficulties.”

How you qualify

Life insurance companies and policies have varying requirements for accessing death benefits early.

For example, holders of some policies may draw from their death benefits if they are unable to perform certain basic tasks, says Michael Parker, vice president of life product management for Lincoln Financial Group, a financial services firm based in the Philadelphia area.

These tasks, or “activities of daily living,” include being able to: bathe; dress; eat; maintain bowel or bladder control; use a toilet without assistance; and transfer to a bed, chair or wheelchair.

With certain Lincoln Financial policies, “Once a person is in a position where they cannot do two out of those six, then they are in a position where they can draw on their benefit,” says Parker.

Other insurance companies or policies may have different standards or may have waiting periods or age restrictions, he adds. For example, the Cincinnati-based Columbus Life Insurance Co. allows policyholders to access their death benefits early if they’ve had a major organ transplant or are diagnosed with life-threatening cancer.

The financial implications

Once you qualify for early death benefits, you may make withdrawals as allowed under the rules of your policy, says Kevin Finneran, a vice president of life product management for MetLife. But it will cost you.

With some life insurance companies, you pay for the possibility of accelerated death benefits upfront via extra charges tacked on to your policy premiums. With other insurers, the price is a reduced death benefit.

“The exact nature of that reduction does tend to vary by company and design and pricing,” Finneran says.

Accessing death benefits early also may have tax implications, says Jeff Hunt, a CFP professional and director of life propositions for Aviva USA life insurance in Des Moines, Iowa.

According to the Internal Revenue Service, death benefits are generally excluded from federal income tax when paid to terminally ill policyholders. Death benefits paid to the chronically ill also can be excluded. However, limits may apply, and an annual certification is required from a licensed health care professional to show that the taxpayer is indeed ill.

The biggest financial ramifications of taking accelerated death benefits may not fall on you at all. Drawing death benefits early reduces the amount left for survivors and can impact estate taxes and other legacy-planning costs, says Feldman.

Before encountering a health condition severe and expensive enough to require an early death benefit, Feldman recommends that life insurance policyholders review their plans’ eligibility requirements and costs. Then, if the time comes to use those benefits, consult a professional.

“The first thing that I would recommend is sitting down with an agent or adviser,” he says, “reviewing all the assets and then looking at the accelerated death benefits and saying, ‘This is one of the things that we could use in order to solve the problem’ and making the determination that it is, in fact, the best way to do it.”