Facing a terminal diagnosis is a challenging experience, both emotionally and financially. Many policyholders wonder if they can use their life insurance to cover medical expenses, improve their quality of life or provide for their loved ones before they pass. This leads to the question: Can you cash out life insurance if terminally ill?
Fortunately, several options exist for accessing the value of a life insurance policy. This article explores the ways terminally ill individuals can tap into their life insurance, the differences between viatical and life settlements, and why considering a life settlement before becoming terminally ill may provide more financial flexibility.
TERMINAL ILLNESS AND LIFE INSURANCE: THE BASICS
Life insurance is primarily designed to provide financial security to beneficiaries after the policyholder’s passing. However, certain provisions may allow policyholders to access funds while still alive, especially in cases of severe illness. Understanding your policy’s terminally ill life insurance guidelines and available options can help you make the best financial decision for you and your family.
Permanent life insurance policies, such as whole and universal life, often accumulate cash value over time. Some term life policies also offer riders that may enable early payouts in the case of a terminal illness. Reviewing your policy with your insurer or financial advisor can help clarify if you have a terminal illness clause in your life insurance.
OPTIONS FOR TAPPING INTO LIFE INSURANCE WITH A TERMINAL DIAGNOSIS
If you’ve been diagnosed with a terminal illness, there are several ways you can access the funds in your life insurance policy to help with medical costs, caregiving or personal expenses.
Accelerated Death Benefits
Many life insurance policies include an accelerated death benefit (ADB) rider, which allows you to receive a portion of your death benefit while you’re still alive. This option is typically available if you have a terminal illness with a life expectancy of 12 to 24 months, though exact terms vary by insurer.
The payout can help cover medical expenses, long-term care or any other financial needs, but it reduces the amount your beneficiaries will receive upon your passing. Still, using an accelerated death benefit rider could help you get the funds you need now and still have coverage for your loved ones after you pass.
Viatical Settlements
A viatical settlement is an arrangement where a third party purchases your life insurance policy for a lump sum, which is usually higher than the policy’s cash surrender value but less than the death benefit. Viatical settlements are specifically designed for terminally ill individuals, typically those with a life expectancy of two years or less. There are generally no age restrictions on who qualifies for a viatical settlement.
The funds from a viatical settlement can be used however you choose, providing greater financial freedom during your final months or years. Additionally, viatical settlements are tax-free if the proceeds are used for healthcare expenses. This could make a viatical settlement a good option if you’re facing a terminal illness and need funds to cover expensive medical bills.
Life Settlements
A life settlement is similar to a viatical settlement but is not limited to individuals with terminal illnesses. If you have a life insurance policy you no longer need or can no longer afford, you may be able to sell it to a third party for a lump sum.
The buyer continues to pay the premiums and eventually receives the death benefit.
However, policyholders can choose to retain a portion of their policy so that their beneficiaries receive a payout when the policyholder passes. For example, a policyholder with a $1 million death benefit might sell $700,000 of the policy in a life settlement. They still retain $300,000 of coverage for their beneficiaries, such as children or other loved ones, and the buyer takes over the full cost of premiums.
Life settlements typically yield a higher payout than surrendering the policy for its cash value but less than the full death benefit. This option is often used by seniors who no longer need their policy but can be considered by individuals with serious illnesses who do not meet the requirements for a viatical settlement.
VIATICAL SETTLEMENTS VS. LIFE SETTLEMENTS: WHAT’S THE DIFFERENCE?
While both viatical and life settlements allow policyholders to sell their life insurance for a cash payout, key differences exist, including:
- Eligibility: Viatical settlements are only available to those with a terminal illness (usually a life expectancy of less than two years). Life settlements are available to older adults (typically 65+) who may not have a terminal illness but no longer need their policy.
- Payout: Viatical settlements generally offer higher payouts than life settlements due to the shorter expected duration of the policy.
- Taxation: Viatical settlements are typically tax-free if the seller is terminally ill, while life settlements may be subject to taxes depending on the circumstances.
CONSIDER A LIFE SETTLEMENT BEFORE A TERMINAL DIAGNOSIS
If you’re considering selling your life insurance policy, doing so before receiving a terminal diagnosis may provide better financial outcomes. Life settlements are available to a broader range of individuals than viatical settlements and offer competitive payouts. If you no longer need your policy, exploring a life settlement sooner rather than later can give you financial flexibility and prevent potential limitations if your health worsens.
Many people hold onto life insurance policies they no longer require, unaware that they could convert them into a valuable financial resource. If maintaining premium payments has become a burden or your needs have changed with your illness, a life settlement may be a proactive solution to consider before qualifying for a viatical settlement.
GET HELP EXPLORING YOUR OPTIONS
Receiving a terminal diagnosis is overwhelming, and financial concerns should be the last thing on your mind. Understanding your options — whether through accelerated death benefits, viatical settlements or life settlements — can help you make informed decisions about your financial future.
If you’re interested in exploring a life settlement as an option, contact Life Settlement Advisors to learn more about how you can maximize the value of your life insurance policy and secure financial peace of mind during this difficult time.
