How are life insurance death benefits treated for tax purposes when received by a terminally ill insured under the accelerated benefits rider?

When a terminally ill insured receives life insurance death benefits under an accelerated benefits rider, those benefits are typically considered to be generally income tax-free. This tax treatment is based on the principle that the benefits are designed to provide financial support during a time of critical need, allowing individuals to access their policy’s benefits when faced with terminal illness and often high medical expenses.

The rationale for this tax-free status is that the accelerated benefits are not considered income in the traditional sense since they are payments of the death benefit designed to alleviate the financial burden that can accompany terminal illness. Since the IRS allows these benefits to be received without tax implications, this ensures that individuals can utilize their policy's funds without the additional strain of tax liabilities during a difficult time.

Thus, individuals receiving accelerated death benefits can focus on their health and financial management without the concern of incurring additional tax burdens from these funds.