Life insurance can meet many needs over the course of your lifetime. In addition to providing for your family or other groups after your death, life insurance benefits can help the insured deal with the financial consequences of terminal illnesses. These additional benefits are purchased through riders that allow you to modify your basic insurance coverage for an additional premium. Three types of riders are available for people with terminal illnesses, including accelerated death benefits, life settlements and viatical settlements. Review riders carefully because definitions of "terminal illness" may vary.
Accelerated Death Benefits
Investopedia states that accelerated death benefits allow the insured to receive a cash advance against a portion of the policy's death benefit to help pay for care related to a terminal illness. The amount of money available will depend on the rider's terms and can vary from 25 percent to 100 percent of the total death benefit.
Accelerated death benefits paid due to terminal illness are not taxable, according to the Internal Revenue Service. Incorporating an accelerated death benefit into your tax planning can be beneficial for this reason. However, a consequence of using accelerated death benefits is that the final amount paid on your death is reduced by the amount of cash advanced for the terminal illness. If leaving an inheritance is important to you, understand clearly how using the accelerated death benefit will impact the final payment to your heirs.
Life Settlements
The U.S. Department of Health and Human Services describes life settlements as granting the policy holder the ability to raise cash by selling his insurance policy. Women must be at least 74 years old and men at least 70 before a life settlement can be accessed. While this use of an insurance policy is not limited to those with terminal illnesses, using the life settlement option is one way to provide immediate access to cash for someone with a terminal illness. Policies are sold for present value and proceeds are taxable to the recipient. No benefits are paid to your heirs when you die.
Viatical Settlements
Viatical settlements are similar to life settlements, but use is limited to people with terminal illnesses and a life expectancy of 24 months or less. A viatical settlement is the sale of your life insurance policy for an amount less than its face value to a third party who receives the full benefit when you die. The amount you receive depends on your life expectancy and, according to the Internal Revenue Service, is not taxable to you if your policy is sold to a viatical settlement provider. A disadvantage of a viatical settlement is that no proceeds of the insurance policy will be paid to your heirs on your death.
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