Advanced Underwriting Consultants

Ask the Experts – December 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Are accelerated death benefits subject to ordinary income tax treatment?

Answer: Generally, accelerated death benefits are excluded from gross income under Section 101(g) if the insured is either terminally or chronically ill.

The IRS in Publication 554 gives further guidance on terminally and chronically ill persons:

A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months.

A chronically ill person is not terminally ill, but has been certified within the last 12 months by a health care practitioner as meeting either of the following conditions:

    • The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing and continence) for a period of 90 days or more because of a loss of functional capacity.
    • The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment.

Accelerated benefits which pay for long-term-care expenses for chronically ill persons are fully excludible, as are per diem costs up to a reasonable limit.

The exclusion does not apply to amounts paid to another person if the he or she has an insurable interest 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.

If the death benefits are accelerated for a reason other than being terminally or chronically ill, the benefits are not excluded from income under Section 101. However, they might be income tax-free under another Code Section, such as Section 104 with respect to a Critical Illness Rider.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.