Accelerated Death Benefits (ADB) is a life insurance rider that pays proceeds to the policyholder before the insured individual dies. Generally, when individuals consider life insurance policies and their various provisions, the payout only occurs upon the insured’s death.
The ADB payout is available when the insured experiences a “qualifying trigger” event, which can vary significantly between policies.
Some of the typical qualifying events include the following:
- A terminal illness where the policyholder may die within 24 months.
- A chronic illness is when one cannot perform regular tasks without daily supervision.
- Permanent residency in a nursing home.
- Other critical illness or injury that substantially reduces the individual’s life expectancy.
- Other long-term care is required because the insured cannot perform daily tasks without assistance.
The rationale behind the ADB payout is the insured needs the funds now to pay for their health care and medical costs. Rather than incur substantial medical debts during their life, those costs can be covered with the eventual proceeds under a life policy.
U.S. Federal Tax Treatment of ADB Advances
Under IRC Section 101(a), most life insurance proceeds are not subject to federal income taxes. There are, however, special rules that apply to ADB proceeds under Section 101(g).1
Under Sections 101(g)(1)(A) and (B), amounts received under a life insurance contract for a terminally ill individual or a chronically ill individual will be treated as amounts paid by reason of the death of the insured. Therefore, ADB amounts paid for those two reasons may be excluded from gross income.
ADB payouts may be taxable if they meet the accident and health benefits definition under Section 104(a)(3).2 Depending on whether the employer paid the premiums, these benefits may or may not be taxable to the individual.
The life insurance tax rules are incredibly complex, so an individual must consult with a tax advisor before purchasing a policy.
Other Information
Taxpayers can find more information on the taxability of life insurance proceeds in IRS Publication 525 (Taxable and Nontaxable Income).