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.