Academic journal article Journal of Accountancy

Accelerated Death Benefits

Academic journal article Journal of Accountancy

Accelerated Death Benefits

Article excerpt

Life insurance companies have developed new types of contracts that dispense all or part of a policy's face value before the insured's death. In addition to traditional death benefits, such policies provide "living benefits" that help policyholders deal financially with medical care and long-term-care costs. Such living benefits, also known as "accelerated death benefits," fall into two categories: mortality benefits, or those associated with premature death (and the medical or living costs of terminally ill individuals), and morbidity benefits, those associated with various forms of disability (for example, accident and health benefits on the occurrence of specified diseases or conditions requiring long-term nursing care).

TAX TREATMENT

Even though such policies have existed for many years, the tax treatment of their benefits is uncertain. If treated as proceeds from a life insurance contract paid on the insured's death, they can be excluded from taxpayers' gross income. If deemed to be amounts received from an accident and health plan, they can be fully taxable to the recipient as ordinary income. Recently proposed Internal Revenue Service regulations on the treatment of benefits under these policies may provide some much-needed guidance in this area.

TRIGGERING EVENTS

Payments of insurance policy benefits are triggered by a specific event or events. For accelerated benefits, the triggers traditionally used have been the following:

* Diagnosis of a terminal illness, with the insured's life expectancy severely limited.

* Diagnosis of a catastrophic illness specifically listed in the insurance policy.

* The need for long-term care in a nursing home, for home health care or the loss of the ability to perform certain necessary activities for oneself.

* The diagnosed need for life-time confinement to a long-term custodial care facility.

TREATMENT OF LIFE INSURANCE PROCEEDS

To be excluded from taxpayers' gross income, amounts received under a life insurance contract must be paid on the insured's death. …

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