Decoding 3 types of life insurance death benefits
Learn the differences between accelerated, level, and limited death benefits
Life insurance helps financially take care of your family and loved ones in the event of your death. Understanding the different types of life insurance and the death benefits they offer can help you choose which insurance plan is best for you.
“A death benefit is the amount of money that will be paid upon the death of the insured,” explained Stacey Haws, actuarial associate at Great Western Insurance Company (GWIC®). “In earlier times, different things were used as death benefits, but because the value of those things changed over time, insurance regulators at the state level determined that it would be best to always deal with cash.”
Death benefits for life insurance plans can be paid out in different ways. Here we explain accelerated death benefits, level death benefits, and limited death benefits.
What is an accelerated death benefit?
Also known as a living benefit or terminal illness benefit, an accelerated death benefit (ADB) allows you to receive a cash advance on your death benefit while you’re still alive. In the same way that Final Expense insurance covers a broad range of things, the money you receive from ADBs can be used for medical or living expenses or to help relieve your loved ones of financial burdens, such as paying off debt during your final years.
“The idea behind accelerated death benefits is to allow people to access the present value of their death benefits or a portion of it while they’re still alive,” said Haws. “Accelerated death benefits give you a little bit of added security, knowing that if you have expenses prior to death, you can access some of your death benefits to pay for them.”
Typically, you can become eligible for accelerated death benefits if you meet any of the following criteria:
- You’ve been diagnosed with a terminal illness and are expected to die within two years.
- Your life expectancy has been reduced, typically due to a critical illness, such as cancer, a heart attack, stroke, kidney failure, paralysis, coma, or amyotrophic lateral sclerosis (ALS or Lou Gehrig’s disease).
- You have a chronic illness that requires assistance with activities of daily living, which include bathing, eating, getting dressed, toileting, and transferring.
- You need an organ transplant because of an illness.
- You are confined to hospice care or a nursing home facility.
Accelerated death benefits can be paid in a lump sum or in installments. The form of payment you receive matters, because receiving death benefits could impact your tax liability, affect your eligibility for Medicaid, or have other implications for you or your beneficiaries — the people you choose to receive your death benefits after you die.
Accelerated death benefits aren’t borrowed or loaned. Instead, the amount of money you receive is deducted from your death benefit, which reduces the amount of financial support your loved ones will have to cover your funeral or other expenses after you die.
What is a level death benefit?
Life insurance companies offer level death benefits that pay the same amount to your beneficiaries after your death, regardless of when you purchased the life insurance policy. The premiums for level death benefits, such as those offered by GWIC’s Final Expense insurance plans, are typically cheaper than life insurance policies with increasing — or graded — death benefits. If you’re over the age of 60, when premiums for life insurance policies typically increase, the lower premiums for a life insurance policy with level death benefits may make sense for you.
“Level death benefits are offered through GWIC’s first-day coverage plan,” explained Haws. “To qualify for level death benefits, you show us you’re in good health by answering a few health questions, which are verified by surviving the first two policy years, and we’ll pay you a full death benefit starting on day one.”
If you’re healthy and qualify for first-day coverage with level death benefits on GWIC’s Final Expense insurance, for example, and buy a policy with a face amount of $1,000, your death benefit would be 125% of the face amount — in this case, $1,250 — starting on day one, and it would stay that amount for the life of the policy.
If you don’t qualify for level death benefits with first-day coverage, GWIC will still issue you a life insurance policy, but it will have a limited death benefit.
What is a limited death benefit?
Limited death benefits restrict the amount of life insurance coverage you have for a certain period of time. GWIC’s limited death benefits return your life insurance premiums during the first two policy years with an additional amount. If you’re not healthy, you can typically still purchase a life insurance policy with a limited death benefit, and if you survive a predetermined number of years — GWIC’s requirement is two — then you may qualify for full coverage.
“On our Final Expense insurance policies, the limited death benefit is equal to 110% of the premiums you’ve paid up to the time of death,” explained Haws. “For example, if you were paying $100 per month for coverage and died after you had paid six monthly premiums, then you would have paid $600. GWIC would take that $600, multiply it by 110%, and pay that amount — in this case, $660 — as a limited death benefit to your beneficiaries.”
Which death benefit is best for you and your loved ones?
A lot of factors should be taken into consideration to determine what is best for you and the beneficiaries who will receive your death benefits. A good life insurance company and agent will look at your situation to help find the best product that provides the death benefit you want at a price you can afford.
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