Under what condition are accelerated death benefits excludable from income?

Accelerated death benefits are designed to provide financial relief to insured individuals who are facing terminal illnesses. These benefits allow the insured to access a portion of their life insurance policy's death benefit early, enabling them to cover medical costs, personal expenses, or any other needs during their time of illness.

The correct condition under which accelerated death benefits are excludable from income is when the insured is terminally ill. This means that if a person is diagnosed with a terminal condition, they can receive these benefits without having to report them as taxable income. The rationale behind this provision is to help alleviate the financial burden on individuals during an incredibly challenging time, ensuring they can focus on their health and well-being rather than financial concerns.

Other conditions, such as being over a certain age, applying within a specific timeframe after diagnosis, or having paid premiums for a designated period, do not universally apply to the tax treatment of accelerated benefits in the same way. The primary focus remains on the individual's health status, specifically being terminally ill, which justifies the tax exclusion.