Accelerated Benefits: refers to the benefits attached to specific life insurance policies whereby a policyholder can receive a part or whole of their death benefits while still alive.
Accelerated Benefits Details
Accelerated benefits are a part of insurance; therefore, it is best to know what life insurance is before proceeding. Life insurance is a contract between an insurance company and an individual (referred to as a policyholder or insured), where the insurance company guarantees to pay a predetermined sum of money to the policyholder's beneficiaries upon their death. The insurance company provides the payment guarantee in exchange for premiums from the policyholder.
An example is if Mr. Jack opens a life insurance policy worth $1 million and names his wife, Mrs. Jack as beneficiary. Whenever Mr. Jack dies, the insurance company will pay his wife $1 million.
Some life insurance policies contain clauses that enable the insured to receive part or all of their life insurance face value. The insured can request these benefits only if they are terminally ill and if their health insurance does not cover the bills. Also, those requiring nursing home confinement are mostly permanent, and those with other long-term high-cost illnesses are usually qualified for accelerated benefits. Generally, any medical condition that makes the insured incapacitated qualifies the insured for accelerated benefits.
The amount that can be collected as accelerated benefits varies and depends on the insurance company. Some companies offer more flexibility than others. For some companies, accelerated benefits can range from 25% to 100% of the face value, while others may restrict it to only 50% and below. The face value used above refers to the cash the insurance company will pay to the listed beneficiaries upon the insured person's death.
For most insurance companies that offer accelerated benefits, the accelerated benefits are included in the contract, and hence the fee already included in the premium. However, some companies may not have it in the contract but may make it available when demanded. For such, the policyholder usually pays a fee separately or may choose to forfeit a percentage of the death benefit.
Accelerated Benefits Example
Kim is a construction engineer. He is married with two children. Sixteen years earlier, Kim took out a life insurance policy worth $500,000 and paid his premiums. Kim is 50 years old but was unfortunately diagnosed with highly malignant brain cancer about two years ago. Kim's health insurance has not been sufficient to foot the bill for some advanced treatments, and now, his cancer has developed to a terminal stage.
Kim has decided to request for an accelerated benefit of half his death benefit. The insurance company reviewed his application and agreed that he is eligible for the accelerated benefit. Fortunately for Kim, the accelerated benefit was included in the insurance policy, and he has already paid for it, so he did not have to pay a separate fee for it.
The insurance company offered Kim a $180,000 accelerated benefit, which he accepted. The insurance company, therefore, made a cash payment of $180,000 to him. Since Kim requested an accelerated benefit of half the face value, the company adjusted his face value to $250,000 instead of the initial $500,000.
In the given example above, you might be wondering why Kim was paid less than half the face value of his life insurance. His face value was $500,000, and he requested for half the face value, so he should have received $250,000 and not the $180,000 he was paid. The lower amount paid to Kim is that the money was discounted to its present value. Note that the face value or death benefit is a future amount that is supposed to be paid in the future. Since there is inflation, the value of a sum of money in the future is less than its current value today.
So half of the future face value is $250,000, but that $250,000 is only worth $180,000 today. The insurance company determines the percentage discount after considering various factors.
Significance of Life Insurance with Accelerated Benefits
It is important to take life insurance with accelerated benefits. Although they may come with some charges, in the end, they are beneficial. Below are some of the benefits of accelerated benefits:
- Policyholders with accelerated benefits have the option to pay for their living expenses while ensuring that their loved one(s) will be cared for after they are gone. Imagine someone needing an organ transplant. Such operations are expensive and, in most places, are not covered by health insurance policies. Instead of becoming a financial burden to their loved ones, the person can easily accelerate their benefits and pay for the transplant.
- When people become ill and cannot perform life's activities such as using the toilet or bathing by themselves, and their health insurance does not cover the full bills of a nursing home, their loved ones have to forfeit their everyday lives or their work to take care of them. With accelerated benefits, the ill person can pay for a nursing home so that their loved ones can go ahead with their lives.
Opting for a life insurance policy with accelerated benefits will provide you with options to take care of yourself and your loved one(s) if your health deteriorates.