Are accelerated death benefits taxable?

What counts as an accelerated death benefit

Under the Accelerated Death Benefits section of Publication 525, certain amounts paid under a life insurance contract, or through a viatical settlement, before the insured’s death are excluded from income if the insured is terminally or chronically ill. A viatical settlement is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of terminally or chronically ill insured individuals and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.

Terminally ill insureds

Accelerated death benefits are fully excludable if the insured is a terminally ill individual. The publication defines that as a person certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification. No dollar cap appears in this section for the terminally ill exclusion.

Chronically ill insureds and the daily limit

If the insured is chronically ill but not terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Benefits paid on a per diem or other periodic basis are excludable only up to a limit, which for 2025 is $420. The limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. The excludable amount for a period is the larger of the cost of qualified long-term care services during the period or the daily dollar amount for the period ($420 per day in 2025), minus any reimbursement received for that cost.

A chronically ill individual is one certified by a licensed health care practitioner within the previous 12 months as either unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing and continence) for at least 90 days without substantial assistance due to loss of functional capacity, or as needing substantial supervision for protection from threats to health and safety due to severe cognitive impairment. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance and personal care services, required by a chronically ill individual under a plan of care prescribed by a licensed health care practitioner.

The business-interest exception

The exclusion does not apply to any amount paid to a person, other than the insured, who has an insurable interest in the life of the insured because the insured is a director, officer or employee of that person, or has a financial interest in that person’s business. A company that buys a policy on its own executive does not get the exclusion on that basis.

Form 8853

To claim an exclusion for accelerated death benefits paid on a per diem or other periodic basis, you must file Form 8853 with your return (see Section C of the form and its instructions). You do not have to file Form 8853 to exclude benefits paid on the basis of actual expenses incurred.

Worked example

A chronically ill policyholder receives $15,000 of per diem accelerated death benefits for a 30-day period. The per diem limit for the period is $12,600 (30 x $420). Qualified long-term care costs were $9,000 and no reimbursement was received. The larger of $9,000 and $12,600 is $12,600, so $12,600 is excludable and $2,400 is taxable. If costs had been $16,000, the larger amount would be $16,000 and the whole $15,000 would be excludable. The calculator above uses this method; it is an illustration of the stated limit, not an official IRS worksheet, so use Form 8853 for your return.

Related rules and limits

Death benefits paid after the insured dies follow the general life insurance rules; see is a life insurance payout taxable. Long-term care insurance contract payments have their own section in Publication 525. This page covers Publication 525 (2025); the $420 limit is a 2025 figure and is indexed, so confirm the current year’s amount.

Related Publication 525 topics

More from the same IRS publication: Is life insurance payout taxable?, Is disability pension taxable income?, Are meals and lodging taxable income?.

Sources

• IRS Publication 525, Taxable and Nontaxable Income (2025): the “Accelerated Death Benefits” section and the sections it cross-references. Read November 2, 2026.

Edition read: Publication 525 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.