A terminally ill person, as well as his or her family, faces extreme emotional stress and, oftentimes, serious financial burdens that can seem insurmountable. When a family faces a situation where a loved on is diagnosed with a terminal illness, the last thing they want or need to deal with is a financial mess. Trying to fend of creditors can make a terminally ill person’s final months more difficult than necessary. Additionally, financial hardships so often associated with a terminal illness can alter a family’s focus away from the sick loved one to having to tend to money matters.

In recent years, many progressive life insurance companies have developed mechanisms known as accelerated death benefits that make it possible for a terminally ill policy holder to collect a portion of his or her death benefits early. Under an accelerated death benefits plan, a terminally ill policyholder can ease his or her financial burden by accessing a portion of his or her life insurance policy coverage while still living.

Accelerated death benefits are defined as life insurance proceeds that are paid to a given policyholder prior to the death of that policyholder. A policyholder is eligible for accelerated death benefits only under specific circumstances. Accelerated death benefits are not available to all life insurance policy holders at all times in every circumstance.

A life insurance policyholder deemed eligible to receive accelerated death benefits more often than not has been diagnosed with a terminal illness. However, in certain circumstances, a policyholder has been found eligible for accelerated death benefits if he or she has been diagnosed with a medically incapacitating condition, has a demonstrated need for long-term care or is confined to a nursing care facility.

While accelerated death benefits are a relatively new concept, over 200 insurance companies in the United States now offer these types of plans to qualified policyholders. The percentage of the ultimate benefit under a given life insurance policy that can be included in an accelerated death benefits plan varies by company. Additionally, some companies offer accelerated death benefits paid in recurring installments while other insurers offer lump sum settlements. (General information on accelerated death benefits is available to an interested consumer online at the National Association of Insurance Commissioners’ website at www.naic.org/library/reference/subjects/life_ insurance_accelerated_benefits.)

Consumers are well advised to keep in mind that accelerated death benefits are not intended to serve as replacements for health or long term care insurance. While accelerated death benefits can provide supplemental financial assistance to a terminally ill consumer, these benefits are not designed as replacements for more basic health and long term care policies.

On a somewhat unrelated note, while life insurance proceeds paid out at the time of an insured’s death are not subject to taxation, it is not clear whether accelerated death benefits are tax free in every situation. As a consequence, a tax preparation professional should be consulted to understand the full implication of obtaining accelerated death benefits. (Basic information on tax related issues is provided at the Website www.unclefed.com/Tax-Help/indextopics.html.)

Oftentimes consumers tend to confuse accelerated death benefits with viaticals or life settlements. There are important differences and distinctions between the two types of plans that ultimately permit a life insurance policyholder to obtain funds related to a life insurance policy in advance of death.

Under a viatical settlement plan, a third party actually is stepping into the mix and providing the original life insurance policyholder with funds in advance of death in exchange for the right to receive the actual policy proceeds upon the insured’s death. Pursuant to the terms and conditions of a viatical settlement agreement, the original insured releases his or her interest in the ultimate proceeds from the life insurance policy in consideration for the receipt of a lump sum payment during his or her lifetime.

On the other hand, under a provision allowing for accelerated death benefits within the confines of a life insurance policy, no third party is entering the scene effectively purchasing the ultimate interest in that policy. Rather, when contracting initially with the insured, the insurance carrier includes a proviso in the policy that allows the consumer to obtain at least a partially accelerated payment of what otherwise would be death benefits during the lifetime of the insured. The insured is not contracting away any of his or her rights to actual death benefits that may remain after any accelerated payment under an accelerated death benefits provision in a life insurance policy. (More information on the differences between accelerated death benefits and viatical settlements can be found at law.freeadvice.com/insurance.)