A: Yes, if the acceleration triggers in the contract match the language in Revenue Code Section 101(g).
CodeSection101says that the death benefit paid under a life insurance policy is generally income tax free. Section 101(g) specifically discussed how certain accelerations of the death benefit are treated for income tax purposes.
The following amounts shall be treated as an amount paid by reason of the death of an insured:
• Any amount received under a life insurance contract on the life of an insured who is a terminally ill individual.
• Any amount received under a life insurance contract on the life of an insured who is a chronically ill individual.
Section 101(g) defines terminal illness as follows:
The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification.
Chronic illness has a longer definition: The term “chronically ill individual” has the meaning given such term by section 7702B(c)(2).
Code Section 7702B(c)(2) says the term “chronically ill individual” means any individual who has been certified by a licensed health care practitioner as:
• Being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity, or
• Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.
Any amounts paid to a terminally ill individual who owns a life policy would be tax-free. Benefits paid to a chronically ill policyowner would be tax-free up to $400 per day in 2021 or actual long-term care expenses, if greater.