Leveraging Life Insurance For Those With An Advanced-Stage Illness
By Adam Balinsky
When an individual is diagnosed with an advanced-stage illness, there is a great deal of planning that follows – from weighing various treatment options and informing loved ones to preparing financially for the future.
For some, financial preparations may seem as simple as double-checking their life insurance policy.
As well-informed life insurance professionals and financial planners know, however, it’s hardly that simple. Life insurance is an invaluable asset to those facing advanced-stage illness. It’s also a flexible asset that can be leveraged in different ways to meet individuals’ various financial needs.
This flexibility has become increasingly important. Why? So many Americans battling an advanced-stage disease also face “financial toxicity,” or the financial stress that comes with the cost of copayments, deductibles, coinsurance, medicine and not being able to work. The National Cancer Institute reports some cancer survivors say they spend more than 20 percent of their annual income on medical care.
What does this all boil down to? It is essential that individuals and their advisors know exactly how their life insurance can be leveraged. It could be the difference between financial control and financial toxicity.
I have encountered several misconceptions about life insurance. Here are a few that I see most often — and what the truth really is.
Misconception 1: Life insurance cannot be leveraged during your lifetime.
Perhaps the most widespread misconception is that in-force life insurance is an asset that cannot be leveraged during an individual’s lifetime.
In reality, life insurance can be a source of major financial relief during one’s lifetime. Patients who have critical illness insurance will generally make claims under that type of policy. However, many individuals who have life insurance are unaware that an array of term policies, group policies, and whole or universal life policies can be accessed during one’s lifetime.
Misconception 2: Borrowing directly from the policy provider is always the best solution.
When people learn they can, in fact, tap into their life insurance policy, they often assume borrowing directly from their policy provider is the best option. However, this isn’t always the case. In many situations, a carrier loan is not available because the policy does not have any cash value to borrow against. This approach can be a double-edged sword: The loan may come with a costly interest rate and the withdrawn cash will no longer be available to cover premiums.
Misconception 3: Accelerated benefit riders are a silver bullet.
Some patients may have anticipated the need to access their policies during their lifetimes. In this case, they may have taken a policy with an accelerated benefit rider or a living death benefit rider. Although these riders do allow the withdrawal of policy funds, they are often very narrow and meant to address situations where a person has a life expectancy of less than 12 to 18 months.
Accelerated advances are also generally limited to 30-60 percent of the policy’s face amount. Although restrictive, these riders can be a low-cost option to access funds quickly for those who qualify.
Misconception 4: There aren’t third-party options.
Many individuals don’t know they can tap into their policy during their lifetimes, and many also aren’t aware that there are organizations to help them do exactly that. At Fifth Season Financial’s Funds for Living and Giving (FLAG) program provides qualifying individuals access to a significant portion of the face value of their life insurance policy (as opposed to the cash surrender value). This advance has no restrictions – it can be used for medical bills and living expenses, but also travel, home renovations or a variety of other uses to enhance quality of life.
Throughout the process, the individual's policy is kept in place. As a loan, the FLAG advance is not treated as income to the borrower and those funds are therefore received tax free. The advance is ultimately repaid using the proceeds of the policy and any remaining funds are given to the family. Since life insurance proceeds are generally received tax free to beneficiaries, there is typically no tax leakage or cost in this type of transaction.
Misconception 5: Selling the policy will net the most cash.
Some policyholders might opt for a transaction known as a viatical settlement or life settlement — that is, the absolute sale of a life insurance policy for an amount more than the cash surrender value. This transaction may be attractive to those eager to obtain a single, lump-sum payment. However, regulations can complicate the process, with the insured often waiting four to six months before receiving funds.
In addition, it’s important to note that the transaction is irreversible, and no surplus will be left for beneficiaries once the policyholder passes away. Also, the sale of a policy does generate taxable income.
Misconception 6: Financial toxicity is unavoidable.
This isn’t a misconception about life insurance, per se, but it’s a common and relevant misconception nonetheless. Many assume that financial toxicity is an unfortunate side effect of late-stage illness. That doesn’t have to be the case. Life insurance policies are a valuable and often overlooked asset that can provide a number of options to obtain funds that will ease the financial burden of the patient and their family.
By taking a close look at life insurance options, individuals can leverage their policy in the best way possible to mitigate financial strain. Addressing this issue early on ultimately allows the patient to focus full-time on their health and quality of life with those they care about most.
Adam Balinsky is president of Fifth Season Financial. Adam may be contacted at [email protected].