What is the Terminal Illness Rider and How Does It Work?

The terminal illness rider is a life insurance rider. It may also be called an accelerated death benefit or living needs benefit rider.

Most life insurance companies include this rider on all of their policies at no extra cost to you. That means there’s a good chance this rider is attached to your policy (if it was available).

Because it’s usually a free rider, most agents just add this rider to your policy automatically even if they don’t discuss it with you.

Then, in the unlikely event that you ever need it, it will be there.

But what is the terminal illness rider and how does it work anyway?

What is the terminal illness rider?

The terminal illness rider allows you to “accelerate” a percentage of the face amount of your life insurance policy while you are alive if you are diagnosed with a terminal illness and have less than 12 months to live.

The word accelerate is just a fancy way of saying get part of your life insurance while you are still alive instead of waiting until you die. This is why it’s also sometimes called a living benefit.

How do you know if you have the terminal illness rider attached to your policy?

The best place to look to see if you have a terminal illness rider is in your policy. If you can’t find your policy or need help contact your agent or insurance company and ask them.

Your policy will outline the rules of how the rider works.

Why do life insurance companies allow people to accelerate a portion of their life insurance face amount while they are alive?

Life insurance companies started allowing policyholders to accelerate a portion of their life insurance face amount under a terminal illness rider back in the early 1980’s.

This was in response to the beginning of the AID’s epidemic. An increasing number of people with a terminal illness wanted to sell their life insurance policies to a third party for a lump sum payment.

This arrangement is called a life settlement or viatical settlement. You can still sell policies this way if you want.

But, rather than have their policyholders sell their policies to outside third parties, insurance companies decided they would just offer this option.

A real life example of how the terminal illness benefit can help

Several years ago, one of our policyholders needed a liver transplant. If they didn’t get the liver transplant, they would die. However, if a donor was found, liver transplants are expensive and the client needed as much money as they could raise to help pay for their medical and other personal expenses.

The life insurance policy we had put in place for the client had an accelerated death benefit option. Since the client had less than 12 months to live, they filed a claim under the accelerated death benefit. It was approved by the life insurance company.

While they didn’t receive the full face amount of the life insurance death benefit, the percentage they did receive helped pay for some of their expenses.

The good news was that the terminal illness rider helped the client survive.

Will you be paid 100% of your life insurance face amount?

If you file a claim and it is approved by the insurance company, you won’t receive the full face amount. You’ll only receive a percentage of the face amount minus any fee the insurance company charges.

The percentage paid out may vary by insurance company but will probably range between 75-90% of the face amount.

If you have a $100,000 policy, this means you would receive roughly $75,000 to $90,000 if you qualify (minus any fee).

Are accelerated death benefits taxable?

When a life insurance policy pays out when someone dies, the face amount is generally income tax free. But when you take the benefit while you are alive, there is the potential that the amount of money you receive might be taxable.

While generally not taxable, they could potentially be taxable. You should check with your tax expert to see what the laws are

Is the terminal illness rider really free?

While most life insurance companies don’t charge an extra premium to include the rider on your policy, if you do file a claim, you’ll most likely pay a fee that will come out of your benefit.

Does every policy have this rider?

I add this rider to every policy I write. However, even though every policy can have this option, there are certain minimum face amounts that are required to make the policy eligible for payment.

For example, if you have a $40,000 life insurance policy but the rider states you need at least a $50,000 policy, then you won’t be able to use the terminal illness option.

This means that even though the rider is included, it doesn’t matter since you won’t be able to use it.

A terminal illness rider is different than a critical illness or chronic illness rider

Remember a terminal illness is one where you aren’t expected to live longer than 12 months. A critical illness, like cancer, may not be terminal. A chronic illness on the other hand is one where you have lost the ability to do two of the six activities of daily living (ADL’s).

Activities of daily living are ability to do the things we take for granted everyday like feed ourselves and go to the bathroom without assistance to name two of the six ADL’s.

Some policies have both a terminal illness rider AND a chronic illness rider.

What happens to your policy after a terminal illness claim?

After a terminal illness claim is paid out, the policy terminates. Premiums would no longer need to be paid.

The only reason it wouldn’t terminate is if your life insurance policy face amount is larger than the maximum face amount the insurance company will accelerate. Just like there is a minimum face amount, there is also a maximum face amount.

In you exceed the maximum face amount that can be accelerated, you can continue the remaining life insurance by paying a pro-rated premium for the amount left that will pay out when you die.

Things to consider before filing a claim (or if you don’t qualify)

If you have a permanent policy that has cash value, you may be able to take a policy loan. While it would be a smaller amount, you wouldn’t need to prove you have a terminal illness.

Another thing to consider is you might want to keep your life insurance policy intact to pass on the benefit to your named beneficiary. In that case, you wouldn’t want to file a claim. You could also accelerate less than the maximum amount and keep some life insurance as well.

Also, I suppose it’s possible that any claim made under this rider could affect medicaid eligibility so you want to be careful if you are going to apply for medicaid.

How to file a claim

If you have an agent, contact the agent and ask for help filing the claim. If you don’t have an agent, contact the insurance company directly.

Expect to have to work with your doctor to provide proof you have been diagnosed with a terminal illness.

Conclusion

The terminal illness rider can be an option to raise cash if you are diagnosed with a terminal illness. It’s a lot easier to work with the insurance company (and probably a better deal) than working with an unknown third party.

Have you or anyone you know used the terminal illness rider? Or do you have any additional information you’d like me to add to this article?

Let me know in the comments.