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Life Insurance and Terminal Illness

What if you were faced with the heart-wrenching news that you were terminally ill? How would you provide for the continued financial support of your family and loved ones? How would you and your family pay for the expenses related to your medical care and comfort? Your life insurance policy may be a valuable resource for you and your family. Not only can you use life insurance to provide a source of income to your survivors for their short- and long-term needs, but you also may be able to receive proceeds from the policy while you’re still alive to help meet the expenses related to your illness.

Obtain more life insurance

Even if your health takes a turn for the worse, you may be able to increase your life insurance death benefit without providing evidence of insurability. Increasing the death benefit may provide greater financial support to your survivors after you die. Here are some ways you may be able to increase your death benefit without regard to your health.

If you purchased a guaranteed insurability rider as part of your existing life insurance policy, you may have the option of buying a higher death benefit. However, these riders generally offer the ability to purchase more coverage only on specific dates. Often, the rider may no longer be available after a certain age. Also, optional riders are available for an additional fee and are subject to contractual terms, conditions, and limitations as outlined in the policy.

If your policy pays dividends, you may be able to use those dividends to buy fully paid-up additional life insurance. It’s important to understand that no matter how they’re used or applied, dividends may be taxable to you as ordinary income if the dividends received, plus all previous nontaxable distributions from the policy, exceed the total of all premiums paid for the policy.

Caution: Any guarantees are contingent on the claims-paying ability and financial strength of the issuing company.

Use life insurance for cash

If your life insurance has a cash-value component, you may be able to access that cash to help meet costs associated with your illness, including lost wages, uninsured medical expenses, and respite care. One way to access the cash value is by surrendering the policy. However, if you surrender your policy prematurely, there may be surrender charges and income tax implications, as well as the loss of the death benefit that could be helpful to your survivors.

Or you may be able to borrow against the policy’s cash value. But the loan will reduce the policy’s cash value and death benefit, could increase the chance that the policy will lapse, and might result in a tax liability if the policy terminates before your death.

Your life insurance policy may come with an accelerated benefit rider. As a result of your illness, you may be eligible to receive some, or all, of the face amount of the policy in advance of your death, either in a lump sum or in installments. You also may be able to take less money than the full amount available to you so that some of the death benefit will be payable to your survivors. Usually, you can use the proceeds however you wish. Rules differ for the tax treatment of accelerated death benefits paid to the terminally ill.

You may have added a critical illness life insurance (CILI) rider to your existing policy. CILI pays benefits to you when you are chronically or terminally ill. You can use the money you receive to pay for your daily living expenses, increased medical costs, or any other way you choose. However, the amount you receive (with terminal illness, often 100% of the policy’s face value) will reduce or eliminate benefits payable to your survivors. In addition, there may be tax consequences arising out of payments received from CILI. For more information on the tax treatment of CILI benefits, consult your tax advisor.


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