Question on Accelerated Benefit Rider Disclosure

[AndreaSti]

Health agent here, sell some life, mostly term. Maybe I missed when it started but it looks like the life companies have added the above mentioned disclosure to their applications. Okay fine and good. The first paragraph mentions the payment may be taxable, affect Medicaid benefits, etc, so consult your tax advisors etc etc etc. That's about all it says about taxes. Does anyone know the circumstances where the rider payout would be taxable?

 

[briko3]

I can't think of any situation with a term policy where that would be the case.

 

[somarco]

Publication 554 (2010), Tax Guide for Seniors

Accelerated Death Benefits

Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. However, see Exception , later. For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit.

In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Generally, a viatical settlement provider is one who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill.

To report taxable accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return.

http://www.ehow.com/info_7801809_tax-issues-accelerated-death-benefits.html

Accelerated death benefits refer to death benefits of a life insurance policy that are payable prior to your death. Unfortunately, to receive accelerated death benefits, you have to be chronically or terminally ill. But, if you do qualify for these benefits, the money may be used for just about any purpose and may even be tax-free.

Terminally Ill
A terminally ill individual is defined by the IRS as someone who is diagnosed with a terminal illness by a licensed physician. The individual must be expected to die within 48 months. If an individual qualified for this, then he may receive accelerated death benefits on a tax-free basis. The money may be spent in any manner he wishes. Life insurance companies vary in how they pay terminally ill benefits. Some insurers pay a lump sum settlement while other companies pay benefits on a monthly basis according to what you want or need for the month.

 

[AndreaSti]

Somarco thanks for the link: Here is the exception link:

Exception. The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured:

• Is a director, officer, or employee of the other person, or
• Has a financial interest in the business of the other person.

So if I read this correctly, there may be a taxable event in the case of keyman insurance, where partners are owners of each other's policies. Say the one partner becomes ill and the other partner need the $$ to hire someone else to perform the job of the ill partner (?). Or, if for some reason an employer buys insurance on an employee and is the owner, takes the money before the death of the employee, for the same reason (replace duties).

Anyway, I don't want to spend a lot of time on this, just trying to understand it. Doesn't appear this would be an issue for most term policies (family peace of mind types).

 

[somarco]

There are situations where the payout can be taxable, mostly where the person doesn't die when they are supposed to.