An insured with a terminal illness diagnosis (less than 12 months to live) requests payment from the accelerated death benefit (ADB) rider on his California life insurance policy. Which statement BEST describes the operation of this rider?

Explanation

Under California Insurance Code §10113.1 (and §10295.10 for disclosure requirements) and IRC §101(g), an accelerated death benefit (ADB) rider permits an insured who is terminally ill (typically certified as having 24 months or less to live, or in some contracts 12 months) or chronically ill to receive a portion of the policy's death benefit — typically 25%-95% — while still alive. The amount accelerated reduces the death benefit ultimately paid to the beneficiary, and any policy loans must be addressed. Properly structured ADB payments are excluded from gross income under IRC §101(g). The description paying a living benefit equal to the full face amount without reducing the beneficiary's death benefit is wrong because the rider accelerates, it does not add to, the death benefit; the policy does not pay out twice its face. The version that converts the life policy into a long-term care annuity taxed wholly as ordinary income confuses ADB with a §1035 exchange to an LTC annuity. And the term-only version requiring hospitalization or nursing-facility confinement is fabricated; ADB is available on most permanent and many term policies, requires only the qualifying medical certification, and does not require active hospitalization.