Terminal Illness: How Life Insurance Can Help

A terminal illness diagnosis is never easy, for either the individual receiving the diagnosis or their loved ones. There are decisions to be made – including financial ones – and individuals may begin to grieve prior to the occurrence of the now-inevitable death. There are many resources that exist to help military and veteran families. Two that should be considered are the family’s existing life insurance coverage and, depending on the circumstances, additional coverage.

Often, life insurance is a purchase made with your loved ones in mind, with the intention that the death benefit from a policy go toward making their lives easier in your absence, after death. In some cases, though, life insurance can provide a financial benefit while the insured is still living, and while this does impact the amount of money that passes to beneficiaries after the death of the insured, it can also make life easier for everyone before that inevitability comes to pass. Specifically, the death benefit from a life insurance policy may become accessible if the insured were to develop a terminal illness.

This brings up two questions: Does the individual have the ability to apply for coverage after receiving their terminal illness diagnosis? How can an individual who already has life insurance in place use the policy after a terminal illness diagnosis?

If the insured developed a terminal illness and you are hoping to purchase a life insurance policy…

A terminally ill individual is unlikely to be approved for traditional term or permanent insurance coverage because their illness renders them effectively uninsurable. This means that they are not healthy enough to qualify for life insurance coverage due to the underlying illness or the symptoms associated with their illness – both of which would need to be disclosed on a life insurance application and are normally verified by a life insurance medical exam.

However, individuals with a terminal diagnosis may qualify for one of the following:

• Guaranteed issue life insurance
• Funeral or final expense life insurance

These types of life insurance coverage usually accept all applicants, regardless of their health status (though there may be age parameters in place). While coverage amounts are typically limited to between $10,000 and $25,000 and premiums are more expensive than they would be for healthy individuals, there is no threat of decline. Funeral and final expense life insurance policies, in particular, are purchased for the sole purpose of providing funds to pay for final expenses (outstanding medical bills, funeral and burial expenses, and costs associated with end-of-life care).

These types of policies offer some peace of mind to individuals who feel as if they have no other option. It should be noted, however, that many of these policies have clauses that reduce the death benefit paid to beneficiaries if the insured passes away within a certain period of time after the policy’s inception. They may be a better choice for individuals with terminal diagnoses in the three-to-five year range, rather than those who are expected to pass away more quickly.

Another option for individuals with terminal diagnoses, provided they are employed, is group life insurance coverage offered by their employers. Often, group life insurance is provided to all employees at a low cost in some multiple of each employee’s annual salary (e.g., 1.5 times the employee’s salary). While coverage beyond that amount may require an application and medical exam, the base coverage is usually offered to the entire group, regardless of health status. Individuals may be able to opt in during open enrollment or may have been covered since their first day of employment.

While neither of these options allows the policy owner to access the death benefit prior to the insured’s death, the insured and the family may feel more at peace with the knowledge that death benefits will become available for outstanding medical bills and final expenses after the insured’s death.

If you purchased life insurance prior to the insured developing a terminal illness…

There are a few options that may be available to you, depending on the type of policy you own.

• You may be able to take out a policy loan. If you have a permanent life insurance policy, you may be able to access the policy’s cash value in the form of a policy loan. While a loan will immediately reduce the policy’s cash value, that money is generally provided tax free to be used by the policy owner as they see fit.
• You may be able to purchase more coverage through a Guaranteed Insurability Rider. If you purchased a Guaranteed Insurability Rider – typically offered on permanent policies – when you applied for the policy, you should be able to increase your coverage at designated points without having to undergo additional medical exams and underwriting. Typically, this rider allows you to purchase additional coverage every three to five years. This can be a good option for increased coverage provided the insured’s life expectancy is long enough to make it to the next period during which coverage can be increased.
• You may be able to access the death benefit early through an Accelerated Death Benefit Rider. Accelerated Death Benefit Riders offer the policy owner the ability to access the policy’s death benefit early if the insured develops either a chronic or terminal illness. The portion of the death benefit that becomes accessible depends on the company and the policy, but funds can normally be used as the policy owner’s needs dictate.
  • If you have SGLI, FSGLI, or VGLI:
    SGLI, FSGLI, and VGLI all offer accelerated death benefits if a policy holder is diagnosed with a terminal illness and had less than 9 months to live. The Accelerated Benefit Option allows you to receive up to 50% of your SGLI or VGLI benefit if you have been diagnosed by your physician as being terminally ill with nine (9) months or less to live. Only the insured can apply for this benefit. For more information, visit: https://benefits.va.gov/INSURANCE/forms/SGLV-8284.pdf

Navy Mutual’s term and permanent insurance policies offer a Terminal Illness Option at no additional cost. To execute the option, which allows a one-time, lump-sum payment of up to 100% of the death benefit to be paid, the insured must be diagnosed with a terminal illness resulting in a remaining life expectancy of 24 months or less and the policy must have been in effect for at least five years. This money can be used while the insured is alive to cover the costs associated with terminal illnesses, including: hospice or skilled nursing care or in-home accommodations; replacement income for family members who have become caretakers; help with medical bills; payment of final expenses; and more.

Final expense and guaranteed issue policies can provide a death benefit to help pay for end-of-life costs and reduce the immediate financial burden placed on the insured’s family after their death. Existing life insurance policies can provide families with financial resources ahead of time, allowing them to get their affairs in order and create a plan when faced with a terminal illness diagnosis. Taken together, existing and new policies can provide some peace of mind for soon-to-be survivors and those who know they will be leaving their loved ones behind.