By Hans Goldstein, Founder, Retirement Literacy Foundation. He is also a licensed California insurance producer (#4273294). Education, not a product recommendation.Published · Methodology dated October 3, 2026
In one insurer’s own brochure examples, a discount-method rider paid 92% of the amount accelerated for a terminal illness with 8 months to live, 54% after a heart attack with a 10-year life expectancy, and about 30% for a chronic illness at 45.
What "up to" means
Most living benefit riders sold with life insurance are accelerated death benefit riders. The "up to X%" is the most you can accelerate (pull forward) from the death benefit. It is not the check. Under the most common design, the discount method, the insurer pays the present value of the death benefit it expects to pay later, based on your new life expectancy, minus a fee and adjustments for any policy loan and future premiums. The longer you are expected to live after the claim, the bigger the discount.
| Example in the insurer’s materials | Accelerated | Paid | Share paid |
|---|---|---|---|
| Terminal illness, age 53, 8 months to live, $500,000 policy | $500,000 | $462,103 | 92% |
| Heart attack at 48, 10-year life expectancy, $250,000 policy | $225,000 | $122,258 | 54% |
| Same heart attack case, older brochure | $225,000 | $52,294 | 23% |
| Chronic illness at 45, $300,000 policy | $75,252 | $22,285 | 30% |
| Chronic illness case, older brochure | $72,000 | $8,554 | 12% |
A second insurer’s California brochure caps a critical illness election at the lesser of 25% of the face amount or $50,000, and guarantees only 40% of that, or $20,000 on a $500,000 policy.
Three designs, three very different checks
- Discount (present value). No upfront cost; the reduction happens at claim. This is the most common design and the one behind most "free" living benefit riders.
- Lien. The advance is a lien against the death benefit that accrues interest, capped at the greater of the 90-day Treasury bill yield or the maximum statutory adjustable policy loan rate.
- Explicit premium (a charged or prepaid rider). You pay for it along the way, and it pays much closer to full value, often monthly. Long-term care riders written under IRC 7702B fall in this group.
So "living benefits" is not one thing. A free discount rider and a paid long-term care rider can both be described as living benefits, and they behave nothing alike at claim.
Not a long-term care substitute
California law says it directly: an accelerated death benefit cannot be marketed as long-term care insurance, and the buyer must receive a notice that the benefit is "not long-term care" and "may be taxable" (Insurance Code 10295 to 10295.19). Agents must be able to explain the difference. A chronic illness payout under a discount rider is a reduced advance on your own death benefit, not an insurance pool built to pay for care.
Definitions that decide the claim
Terminal: federal tax law (IRC 101(g)) uses death expected within 24 months; insurers use 12 or 24 months, and California does not allow a window shorter than 6 months. Chronic: unable to perform 2 of 6 activities of daily living for 90 days or more, or severe cognitive impairment. Critical: a list of named events set by the insurer, such as heart attack, stroke or invasive cancer.
Taxes
Terminally ill payments are generally excluded from income under IRC 101(g). Chronically ill payments are excluded up to actual qualified care costs or the per diem limit, $430 a day for 2026 (Rev. Proc. 2025-32). Payments are reported on Form 1099-LTC and Form 8853. Critical illness payouts that fall outside the 101(g) definitions can be taxable. A lump sum can also affect eligibility for means-tested programs, which is why California requires that disclosure.
Questions to ask before you count on a living benefit
- Is this a discount, lien or charged rider? If it is "free," expect a discount at claim.
- Show me the insurer’s own example payout for a chronic illness at my age, not the terminal example.
- What is the maximum per year, and is there a lifetime cap or a per-claim fee?
- Does it qualify under IRC 7702B as long-term care, or is it an accelerated death benefit?
- Listen for "will pay" versus "up to." The honest word is "up to."
Methodology (dated October 3, 2026)
We collected the hypothetical claim examples that insurers publish in their own consumer and agent materials for accelerated death benefit riders, and computed the paid amount as a share of the amount accelerated. Figures are the insurers’ illustrations, not actual claims data, and depend on the assumptions shown in each brochure (age, diagnosis, life expectancy, interest rate). Legal points come from the cited statutes. This page names an insurer only because the examples are that insurer’s published figures; it is not a rating of any product. Checked October 3, 2026.
Sources
- Transamerica FFIUL II Living Benefits brochure (07/25)
- Transamerica chronic illness guide (older edition)
- North American Company, California accelerated benefits consumer brochure
- LSW living benefits rider guide
- California Insurance Code 10295 (accelerated death benefits)
- 26 U.S.C. 101 (death benefits, accelerated benefits), Cornell LII
- IRS Rev. Proc. 2025-32 (2026 per diem limit)
- IRS Instructions for Form 8853
Goldstein, H. (2026, October 3). "Up To" Living Benefits: What Accelerated Death Benefit Riders Really Pay. Retirement Literacy Foundation. https://retirementliteracyfoundation.org/research/living-benefit-riders-up-to/
Journalists and educators may quote and chart these findings with a link to this page. Data: download the CSV.
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