54 / What is the income tax treatment of an accelerated death benefit payment from a life insurance contract?

Generally, any amount received under a life insurance contract on the life of a terminally ill insured or a chronically ill insured will be treated as an amount paid by reason of the death of the insured.¹ Amounts received under a life insurance contract by reason of the death of the insured are not includable in gross income.² See Q 63. Thus, an accelerated death benefit meeting these requirements will generally be received free of income tax.

However, amounts paid to a chronically ill individual are subject to the same limitations that apply to long-term care benefits. Generally, this is a limitation of the amount of benefits per day ($420 in 2025, $410 in 2024, $420 in 2023 and $390 in 2022).³ See Q 491. More specifically, if the total periodic long-term care payments received from all policies and any periodic payments received that are treated as paid by reason of the death of the insured (under IRC Section 101(g)) exceed a per-diem limitation, the excess must be included in income (without regard to IRC Section 72). (If the insured is terminally ill when a payment treated under IRC Section 101(g) is received, the payment is not taken into account for this purpose.)⁴

The per-diem limitation is equal to the greater of (1) a $420 per day limitation in 2025 ($410 in 2024, $420 in 2023 and $390 in 2022) or (2) the actual costs incurred for qualified long-term care services provided for the insured less any payments received as reimbursement for qualified long-term care services for the insured.⁵ This figure is adjusted for inflation annually.⁶ Accelerated death benefits paid to terminally ill individuals are not subject to this limit.

Example. In 2024, Mr. Heller received qualified long-term care services for 30 days at a total cost of $7,500. A qualified long-term care insurance contract paid him a benefit of $410 per day, $12,300 total. In addition, $500 of the cost of the qualified long-term care services was reimbursed by another source. Thus, $500 of the $12,300 benefit is includable in income by Mr. Heller.

A terminally ill individual is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months following the certification.⁷

A chronically ill individual is a person who is not terminally ill and who has been certified by a licensed health care practitioner as unable to perform, without substantial assistance, at least two activities of daily living (ADLs) for at least 90 days or a person with a similar level of disability. Further, a person may be considered chronically ill if he requires substantial supervision to protect himself from threats to his health and safety due to a severe cognitive impairment and this condition has been certified by a healthcare practitioner within the previous twelve months.⁸ See Q 477. The ADLs are: (1) eating; (2) toileting; (3) transferring; (4) bathing; (5) dressing; and (6) continence.⁹