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One of the things that doesn’t seem to get factored into to “how much life insurance do I need?” calculations is what might happen to your savings during a prolonged illness (and with improving healthcare some of these terminal illnesses can take years before they finally do you in). Suppose I get a terminal cancer… I’m personally not going to want to work and will want to spend as much of that time as possible with family. So in fact, I would hope my wife wouldn’t have to work during my last few months or years to live as well and maybe she’ll need time to grieve and figure things out should I pass away. And healthcare expenses might go up dramatically. So I may have a good amount of savings now but I don’t want to have to worry about that savings while dealing with a terminal illness.
This is a very good point and something that everyone should consider. In fact, most Term policies already have an Accelerated Death Benefit/Terminal Illness Rider, which is a free provision that sits on the policy and allows you to access a portion of the death benefit, in the event that you become Terminally Ill and have a life expectancy diagnosis of 12 months or less. There are a few carriers who have a 24 month trigger, with most being a 12 month trigger, but some carriers have a more stringent 6 month trigger. Every carrier has different parameters with regard to the life expectancy trigger, in addition to the amount that you will be able to access or accelerate, but this is something that a broker should easily be able to answer for you.
In all honesty, out of the nearly 10k clients that we’ve had over the past 40 years, I’ve only seen the Terminal Illness Rider used about 5-10 times, but it’s a great option to have, as there is no cost unless you were to actually exercise the option. The most recent example of a client using this Terminal Illness Rider was with American General. She was a 50yo woman who was diagnosed with pancreatic cancer and had a life expectancy diagnosis of 12 months. She was able to access $250k of her $500k death benefit (AG has a 12mth trigger and a $250k cap), which she was able to use for whatever she liked. She ended up using some of the funds for medical treatment, but sadly, she succumbed to her illness. The remaining $250k then passed as death benefit to her beneficiaries, when she unfortunately passed away a few months later. A very sad situation, but the funds really helped ease some of the family’s concerns.
Lastly, there are also a couple of carriers today who now offer Term with Living Benefit policies, which allow you to access a portion of the death benefit in the event that you become Critically (ie: heart attack, cancer, stroke, etc.), Chronically (ie: are unable to perform 2 ADLs “Activities of Daily Living”), or Terminally Ill. Since you have a much higher chance of becoming Critically Ill, these policies have a much greater appeal to many consumers. In addition, these policies are typically about 5-10% more expensive than the lowest Term carrier, but sometimes these options are in the top 5 lowest carriers on the market – A good broker should be able to point these out to you.
Hope this helps!
are there any tax implications if you take the money yourself? I always wondered how they would know how accurate prognosis is, and what happens if you outlive the prognosis. so if you have 12 month prognosis and get a payout, but miraculously two years later are still alive, what happens?
thanks!
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