Can You Get Life Insurance if You Have a Terminal Illness?

Life insurance offers beneficiaries a payout upon the policyholder’s death. A terminal illness diagnosis makes securing new coverage or accessing existing policy benefits a pressing concern. A terminal illness impacts life insurance’s purpose of financial protection due to shortened life expectancy. Understanding available options requires knowledge of various policy types and benefit structures.

New Traditional Life Insurance

Obtaining a new traditional life insurance policy (term or whole life) is generally not feasible following a terminal illness diagnosis. Insurers rely on a comprehensive medical underwriting process to assess risk. This involves health questionnaires, a medical examination, and a review of medical records and histories. Insurers evaluate family medical history, personal health, and lifestyle to determine insurability and premium rates.

A terminal illness significantly elevates insurer risk. While some health conditions might have “look-back” periods, a terminal diagnosis typically precludes coverage. If an applicant has a life-threatening medical issue or was previously declined coverage, traditional underwriting programs are generally not an option.

Accessing Benefits from Existing Policies

Individuals with a life insurance policy before a terminal illness diagnosis may access a portion of their benefits while still alive. These options provide financial relief for medical expenses, care costs, or to improve quality of life. The two primary avenues are accelerated death benefits and viatical settlements, each with distinct features.

Accelerated Death Benefits (ADB)

Accelerated death benefit riders (living benefits) allow policyholders to access a portion of their life insurance death benefit early. These riders are typically triggered by a terminal illness diagnosis, often defined by a physician as a life expectancy of 24 months or less. Eligibility can extend to chronic or critical illnesses, depending on the rider. Funds can be used for any purpose, including medical bills, long-term care, or other expenses.

An ADB rider payout reduces the total death benefit paid to beneficiaries. Payouts can be a lump sum or installments, typically 25% to 100% of the death benefit. Many policies include this rider at no additional premium, but some may charge a fee or apply a discount.

Accelerated death benefits are generally not subject to federal income tax if the insured is terminally or chronically ill and meets IRS criteria. If benefits exceed IRS limits for chronic illness or are not used for qualified long-term care expenses, a portion could be taxable. These benefits might also affect eligibility for public assistance programs like Medicaid. Policyholders should review their policy documents or contact their insurer to understand its terms.

Viatical Settlements

A viatical settlement involves selling an existing life insurance policy to a third-party company for a lump sum cash payment. This option is typically for individuals with a terminal or chronic illness, often with a life expectancy of 24 months or less, who need immediate financial resources. The viatical settlement company becomes the new owner and beneficiary, assumes responsibility for future premium payments, and receives the full death benefit when the insured passes away.

The cash payout from a viatical settlement is generally more than the policy’s cash surrender value but less than its full death benefit. The process involves an appraisal of the policy’s value and offers from various providers, which can take several months. A primary advantage is immediate access to funds for medical costs, living expenses, or quality-of-life improvements, while eliminating ongoing premium payments.

A significant drawback is that beneficiaries receive no death benefit, as ownership is transferred. Like accelerated death benefits, viatical settlement proceeds are generally tax-free for terminally or chronically ill individuals who meet IRS requirements. If life expectancy is longer than 24 months, proceeds might be subject to taxation based on premiums paid and the amount received. Viatical settlements are for the terminally or chronically ill, distinct from life settlements for healthy older adults, which are typically taxable.

New Coverage Without Medical Underwriting

For individuals diagnosed with a terminal illness who lack an existing life insurance policy, new coverage options are very limited. Traditional underwriting is prohibitive due to elevated risk. However, specific policy types accommodate those with significant health challenges.

Guaranteed Issue Life Insurance

Guaranteed issue life insurance is a permanent type that does not require a medical exam or health questionnaire for approval. Acceptance is generally guaranteed for applicants within a specific age range (typically 45-85 years old). These policies primarily cover final expenses, such as funeral costs.

A graded death benefit is a characteristic of guaranteed issue policies. If the policyholder dies from natural causes within the first two to three years, beneficiaries typically receive only a return of premiums paid, often with interest. The full death benefit is usually paid only if death occurs after this waiting period or results from an accident during it.

Coverage amounts are generally lower than traditional policies ($2,000-$25,000), and premiums are higher due to increased insurer risk. Despite these limitations, guaranteed issue life insurance is a viable option for those with severe health conditions who cannot qualify for other coverage.

Group Life Insurance

Individuals still employed may access group life insurance through their employer. Many group plans offer basic coverage with limited or no medical underwriting. Employees can often enroll regardless of health status.

While basic group coverage may be readily available, obtaining higher amounts or enrolling as a “late applicant” might still trigger some medical underwriting. Group life insurance is typically an existing employment benefit and not a policy newly purchased due to a terminal illness. This option ceases upon employment termination.