If you are terminally ill, your life insurance policy is a valuable resource. Not only can you use life insurance to provide adequate income to your survivors for their short- and long-term needs, but you also may be able to receive a portion of the death proceeds from your life insurance before you die to pay necessary expenses or to fulfill a dream.
Purchase additional life insurance coverage
Taking advantage of opportunities to purchase additional life insurance coverage is important
When you are terminally ill, you pose an obvious risk to an insurance company, and you may be unable to buy additional life insurance coverage. However, during certain periods of the year or under a guaranteed insurability rider (additional purchase option), you may be able to buy additional life insurance without providing proof of medical insurability. If so, obtain the maximum coverage available. If you are taking out a loan to buy a big-ticket item and you are still employed, you may also be able to purchase credit life insurance that will pay off the balance of your loan when you die.
Purchasing additional life insurance will enable you to provide adequate income for your survivors after your death
The more life insurance you purchase, the better your survivors will be protected financially after you die. Therefore, even though your premiums will rise (and possibly strain an already extended budget), you should seriously consider purchasing the maximum amount of coverage available to you.
Purchasing additional coverage can ensure estate liquidity
Buying as much life insurance as you can will help ensure that your estate has adequate cash available to pay for taxes and expenses that arise after you die, including the cost of a funeral, executor’s fees, attorney’s fees, and debts.
Using a life insurance policy to raise cash before you die
Take a loan against the cash surrender value of the policy:
If your life insurance policy has accumulated a cash value, you may be able to obtain a loan from the insurance company, using your policy as collateral. The main disadvantage of taking a loan against your policy when you are terminally ill is that since it’s unlikely you’ll be able to repay it in full before your death, the loan balance will be subtracted from the proceeds that are payable to your beneficiaries.
Apply for benefits from an accelerated death benefit rider
You may own a life insurance policy that includes an accelerated death benefit (ADB) rider. If so, you may be eligible to receive part of the face amount of the policy in advance of your death, either in one lump sum or in installments. Usually, you can use the proceeds however you wish. If you are chronically ill and you want to exclude the benefits from income, payments must be made for costs incurred for qualified long-term care services or made on a periodic basis without regard to costs. Rules differ for the tax treatment of accelerated death benefits paid to the terminally ill. You may also be able to take less money than the full amount available to you so that some benefit will be payable to your survivors. You may also be able to take part of the proceeds available and sell the rest of your policy to a viatical settlement funding company, which can maximize the proceeds payable to you.
Apply for benefits from a critical illness life insurance policy
Critical illness life insurance (CILI) is a form of critical illness insurance. It usually consists of a rider attached to a life insurance policy that pays benefits to you when you are chronically or terminally ill. If you own critical illness life insurance, benefits will be paid to you while you are still living, and you can use the money you receive to pay for your daily living expenses, increased medical costs, or in any other way you choose. However, the amount you receive (with terminal illness, often 100 percent of the policy’s face value) will reduce or eliminate benefits payable to your survivors. Because critical illness life insurance is often composed of a rider (sometimes an ADB rider) attached to a life insurance policy, the income tax consequences may be the same. For more information on the tax treatment of CILI benefits, consult your tax advisor.
Sell your policy to a viatical settlement company or provider
A viatical settlement is the sale of a life insurance policy to a third party, usually a viatical settlement funding company owned by a group of investors. If you are terminally ill or chronically ill, you can sell your policy and generally receive between 40 percent and 85 percent of the face value of the policy. Many individuals use the proceeds to pay medical costs or living expenses, while others use the proceeds to fulfill a final dream or to experience the joy of giving money away to others before they die. However, there are drawbacks. Your survivors will no longer be the beneficiaries of your life insurance policy and will receive no money from the policy when you die. In addition, although money you receive from a viatical settlement is tax free if your life expectancy is 24 months or less, proceeds will be includable in your gross estate under the three-year rule, and money you give away may be subject to gift tax.
Use a combination approach to maximize your benefits
Consider combining different strategies to maximize life insurance benefits payable to you before you die. The following example will illustrate how a combination approach can work to your advantage:
Example(s): Cora owned a life insurance policy with a face value of $200,000 and an accelerated death benefit rider attached to it. When Cora was diagnosed with terminal cancer, she had to decide whether she should sell her policy to a viatical settlement funding company or take all or part of the funds available to her from her ADB rider. Because she wanted to receive the maximum amount possible before her death but still have some money left to give to her son, she listed the options available to her to determine which method would suit her needs: (1) Life insurance policy proceeds payable to son after her death $200,000, (2) Accelerated death benefit available before death (50 percent of face value) $100,000, (3) Viatical settlement proceeds payable before death (70 percent of face value) $140,000, (4) Combination of accelerated death benefit/viatical settlement–50 percent of face value (accelerated death benefit), and (5) 70 percent of remaining face value of policy (viatical settlement) $170,000. Cora realized that using a combination approach would best suit her needs. By combining accelerated death benefits with a viatical settlement, she could receive more money prior to her death than by using either funding method alone. In addition, she could still leave $30,000 to her son.