How a review of employer benefits uncovered a potential source of financial relief for a client facing advanced cancer
The case:
A few years ago, I met with a client diagnosed with advanced cancer. For privacy purposes, I will refer to her as Jane. Jane was in her 60s and planning to retire from her employer within a few months. At the time, she was experiencing significant financial strain related to her ongoing medical treatment and had accumulated sizeable medical and credit card debt. Jane was looking for guidance to alleviate her debt and improve her cash flow.
As part of a comprehensive financial review, we evaluated the benefits available through her employer. Employer-sponsored benefits can present meaningful financial planning opportunities, particularly during periods of illness, disability, or transition.
During this review, Jane noted that she had a group life insurance policy through her employer with a death benefit of approximately $150,000. Given her impending retirement, we conducted a more detailed review of the life insurance policy terms and identified an accelerated death benefit provision, sometimes referred to as a living benefit. Accelerated death benefit provisions are generally designed to allow eligible policyholders to access a portion of their life insurance death benefit early if certain qualifying conditions are met. A qualifying condition may include a terminal illness diagnosis, subject to the specific terms and definitions outlined in the policy.
The execution:
Accelerated death benefit eligibility requirements, benefit amounts, and documentation standards vary by carrier and plan design. Accordingly, we reviewed Jane’s life insurance policy terms, discussed whether the provision might apply to her circumstances, and confirmed eligibility and the next steps directly with the insurance carrier.
When evaluating next steps, we also considered her individual financial and family circumstances. This is important because some group life insurance policies may also include options to convert or port policies upon separation from service or retirement. For some individuals, maintaining life insurance coverage and preserving the death benefit for beneficiaries may be preferable to accessing the benefits early. However, these provisions vary and are not always available. After reviewing the available options, eligibility and potential trade-offs, Jane elected to pursue the accelerated death benefit based on her financial circumstances and objectives.
In practice, accessing benefits such as accelerated death benefits may require persistence, as these provisions are not always widely understood or frequently utilized, which can make navigating the claim process more challenging. In this case, the claim required multiple steps of coordination with the insurance carrier for review and processing.
Outcome:
Ultimately, after the insurer completed its review of Jane’s claim and submitted medical documentation and policy provisions, the claim was approved, and the accelerated death benefit was paid. The proceeds provided Jane with meaningful liquidity, allowing her to pay off her medical and credit card debt, and helping to alleviate some of the financial burden associated with her illness and treatment.
Reflection:
While the above is based on a real case, it is important to note that it is presented for illustrative and educational purposes only and does not constitute legal, tax, or insurance advice. Every situation is unique, and outcomes will vary based on policy provisions, carrier guidelines, underwriting standards, and personal circumstances. No assurance can be given that any individual will be eligible for or approved for similar benefits.
In general, accelerated death benefits paid under qualifying conditions are tax-free; however, individuals should consult a qualified tax professional regarding their specific circumstances. While benefits are generally tax-favorable, receiving a lump sum can still impact other financial resources and planning considerations, making coordination with financial, tax, and legal professionals important.
Life insurance is generally intended to provide financial protection for beneficiaries, and accelerating a death benefit generally reduces the amount payable to beneficiaries upon the insured’s death. Such decisions should be evaluated carefully within the context of one’s family situation, estate planning considerations, and broader financial objectives. In Jane’s case, she was single and did not have any dependents.
Conclusion:
This case highlights a broader planning consideration, in that employer-sponsored benefits may contain provisions that are not widely understood or frequently utilized, yet can have meaningful financial implications during periods of serious illness or life transition.
The availability, suitability, and value of these provisions depend on the individual’s circumstances and the specific terms of the plan. As a result, decisions involving accelerated death benefits should be made only after careful review of plan documents, eligibility requirements, tax implications, and potential trade-offs. Because these elections may be irreversible, they should also be evaluated within the context of an individual’s broader financial, tax, and estate planning objectives as well.
FAQs:
Can I access my life insurance while I’m still alive?
In some cases, yes. Certain life insurance policies include an accelerated death benefit provision, also known as a living benefit, that may allow eligible policyholders to access a portion of their death benefit while living. For an accelerated death benefit to be accessed, you typically need to be diagnosed with a terminal illness.
How do I know if my life insurance policy can pay an accelerated death benefit?
For group life insurance offered through your employer, contact your HR or benefits department and request a copy of the life insurance policy Certificate of Insurance. This document summarizes the key policy details.
For private life insurance policies, contact your agent or the insurance company directly. You may also be able to access your policy documents on your online portal as well.
What are the benefits of taking an accelerated death benefit?
The primary benefit is access to a portion of your life insurance death benefit while you are still living, provided you meet the policy’s eligibility requirements. For some individuals facing a serious illness, these proceeds can provide valuable financial flexibility to help address medical expenses, debt, or other cash flow needs.
What are the negatives of taking an accelerated death benefit?
Accelerating a death benefit generally reduces the benefit payable to beneficiaries upon the insured’s death. In addition, receiving a lump sum may also affect eligibility for certain means-tested government benefit programs and could have other financial planning implications.
Individuals should consult appropriate legal, tax and financial professionals to understand the potential impact on their specific circumstances.
Are accelerated death benefits taxable?
In general, accelerated death benefits paid under qualifying conditions are tax-free; however, tax treatment can depend on individual circumstances and may change over time. Individuals should consult a qualified tax professional regarding their specific situation.
Can I take an accelerated death benefit and still keep my life insurance coverage?
Possibly. The impact on the remaining death benefit depends on the terms of the policy and the amount of benefit accelerated. Some policies may limit the amount that can be accessed, leaving a residual benefit payable to beneficiaries while the policy remains in force. Policy provisions vary, so it is important to review the details with the insurance carrier before making a decision.
