For an insured who is certified as terminally ill, accelerated death benefits received under IRC Section 101(g) are generally:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under IRC Section 101(g), accelerated death benefits paid to a terminally ill insured are treated like life insurance death proceeds and are excluded from gross income. A physician must certify the terminal illness for the exclusion to apply, and for chronically ill insureds the amounts are treated similarly subject to per-diem limits. The tax-free treatment is one of the main reasons living benefits are marketed to seriously ill policyowners who need funds for care. The exclusion applies to payments received before death, so the funds can be used for medical care without creating an income tax burden.
Why the other options are wrong
- B) Section 101(g) specifically excludes these payments from gross income; they are not taxed as ordinary income. The physician certification requirement ensures the exclusion is limited to genuinely terminal conditions.
- C) The 10 percent penalty applies to premature distributions from retirement accounts and modified endowment contracts, not to accelerated death benefits. Section 101(g) expressly provides exclusion from gross income for these payments.
- D) Capital gain treatment does not apply; the benefits are tax-free, not taxed at capital gains rates. The 10 percent penalty applies to premature distributions from retirement accounts and MECs, not living benefits.
Memory hook
Terminally ill, living benefit, zero tax: Section 101(g) pays the advance like a death benefit, tax-free.