How Life Insurance Can Help When You're Dying

Life insurance provides financial protection to your loved ones in the event of your death. However, it is unlikely that you will be able to purchase a new life insurance policy if you or a loved one has been diagnosed with a terminal illness. This is because insurability, a key concept in life insurance, refers to whether an individual is healthy enough to qualify for coverage. While the specific guidelines vary across insurance companies, a terminal diagnosis will generally disqualify an individual from coverage.

Terminal illness and insurability

Insurability is a key concept in the life insurance industry. It refers to whether an individual is healthy enough to qualify for coverage with a particular life insurance company. While each insurance company sets its own guidelines on who it considers to be insurable, a diagnosis of a terminal or serious illness will generally disqualify you from coverage.

Health and age evaluation

Insurance companies will evaluate your health and age when considering your application. Even if you are deemed insurable, older age or certain health issues may result in higher premiums compared to a younger, healthier individual.

Proof of insurability

Insurance companies require proof or evidence of insurability, such as an application with questions about your height, weight, and personal and family medical history. A health examination, including vital screenings and blood/urine samples, may also be necessary. If you have been diagnosed with a terminal illness, it will be revealed in your medical records.

Group life insurance policies

One possible way to obtain coverage despite health issues is through group life insurance policies, often offered by employers. In this case, you are covered simply by being part of the group, without the need for a health screening. While this may not be ideal, it can be an option for those who cannot qualify for individual coverage.

Living benefit riders

Some life insurance policies offer living benefit riders, which allow policyholders to access their death benefit while still alive. These riders are beneficial for those who are terminally ill and need funds for medical care. Policyholders can draw against the face value of the policy, becoming their own beneficiaries.

Whole-of-life insurance policies

Whole-of-life insurance policies are a type of private life insurance that pays out whenever the insured person dies. Unlike term life insurance policies, which only cover a fixed amount of time, whole-of-life policies provide coverage for life, as long as premiums are paid.

What life insurance covers

Life insurance provides financial protection to your loved ones if you die, but it doesn't pay out in every situation. Generally, life insurance covers deaths from natural causes, illnesses, and accidents. Here's what you need to know about what life insurance covers:

Death Benefit Payout

The life insurance death benefit is usually a lump-sum payout to the beneficiaries after the insured person's death. The beneficiaries can typically use the funds from this payout for any purpose, such as funeral costs, medical bills, mortgage payments, education expenses, or other financial obligations.

End-of-Life Costs

Life insurance can help cover end-of-life expenses, including funeral and burial costs, which can be significant. By having life insurance, you can ensure that your loved ones have the financial means to arrange a respectful and dignified farewell without incurring a financial burden.

Personal Debt

Life insurance can also be used to pay off any outstanding personal debt, including loans and credit card bills. This aspect of life insurance helps ensure that your loved ones are not left struggling to pay off your debts in the event of your untimely death.

Everyday Expenses

Life insurance benefits can also cover day-to-day expenses, such as groceries, utilities, and other essential purchases. This aspect is especially important if the deceased was the primary breadwinner, as it provides financial support to help maintain the beneficiaries' standard of living.

Child and Dependent Care

The death benefit from life insurance can also assist with childcare expenses, such as daycare or nanny services. This coverage ensures that beneficiaries can continue to provide care and support for dependents even after the insured person's death.

Charitable Contributions

Life insurance allows you to name a charity as a beneficiary. This feature enables you to make a lasting impact and leave a legacy by supporting a cause that is important to you.

Additional Features

Life insurance policies may also offer additional features, such as a cash value component that grows over time, providing a tax-deferred savings account. Furthermore, life insurance riders can provide access to the death benefit while the insured person is still alive, helping to cover expenses related to terminal illness, hospice care, or other needs.

Choosing a beneficiary

When buying life insurance, you will need to designate a beneficiary—the person or persons you want to receive the death benefit from your policy when you pass away. A life insurance beneficiary can be:

• A family member
• A spouse
• A legal guardian of a minor
• A charitable organization

You can choose to name a single beneficiary or a primary beneficiary and one or more contingent beneficiaries. A contingent beneficiary would receive death benefits from your life insurance policy if the primary beneficiary passes away.

While minor children can be named as beneficiaries of a life insurance policy, they cannot receive any benefits until they reach the age of majority as per state law. They would need a legal guardian to manage the funds.

Death benefits are not paid out automatically from a life insurance policy. The beneficiary must first file a claim with the life insurance company. Depending on the insurance company's processes and procedures, this may be done online or it may require filing a paper claim. No matter how you file, the company normally requires paperwork and supporting evidence to process the claim and payout.

Your beneficiaries may be required to provide a copy of the policy, along with the claims form. They must also submit a certified copy of the death certificate, either through a local government agency or through the hospital or nursing home in which the insured died.

If the policy was 'written in trust', the insurance company will pay the money to whoever was named as the beneficiary. There will not be any inheritance tax to pay on this money. If the policy was not written in trust, the money will be considered part of the person's estate and may be subject to inheritance tax.

When benefits are paid

There is no time limit to claim on a life insurance policy. When the beneficiary is ready, they must contact the insurance company to start a claim. The beneficiary will need to send the insurer some documents, including a copy of the death certificate. Many states allow insurers 30 days to review the claim, after which they can pay it out, deny it, or ask for additional information. Most insurance companies pay within 30 to 60 days of the date of the claim.

There are several possible situations that may result in a delay in payment. For example, beneficiaries may face delays of six to 12 months if the insured dies within the first two years of the policy due to the one- to two-year contestability clause. This clause allows the insurance company to investigate the original application to ensure fraud was not committed. Most policies also contain a suicide clause that allows the company to deny benefits if the insured dies by suicide during the first two years of the policy.

Payments may also be delayed when homicide is listed on the insured's death certificate. In this case, a claims representative may communicate with the detective assigned to the case to rule out the beneficiary as a suspect. The payout is withheld until any suspicion about the beneficiary's involvement in the insured's death is cleared. If there are charges, the insurance company can withhold the payout until the charges are dropped or the beneficiary is acquitted of the crime.

Delays to payouts may also arise if the insured party died during the course of illegal activity, such as driving under the influence, lied on the policy application, or omitted health issues or risky hobbies or activities. Insurance companies can also delay payment for six to 12 months if the insured party dies within the first two years of the policy.

Life insurance through an employer

While it is unlikely that a dying person can purchase a new life insurance policy, they may be able to get coverage through their employer. Employer-provided life insurance is typically group term life insurance offered as part of an employee benefits package. This type of insurance is often available to all full-time employees and does not require a health screening for acceptance.

The amount of coverage provided by employer-provided life insurance is typically determined by the employee's annual salary or position within the company. Usually, employers pay most or all of the premiums. This can be a convenient and cost-effective way for employees to obtain life insurance, especially if they have no existing coverage.

However, it is important to note that employer-provided life insurance only applies to the employee and not their spouse or children. Additionally, the coverage may not be sufficient to meet the financial needs of the employee's dependents in the event of their death. As such, it may be beneficial to supplement employer-provided life insurance with an individual policy.

Employers who choose to offer life insurance benefits must decide which employees will be covered, the type of insurance benefits to provide, and the amount of coverage that is optimal and affordable. Group term life insurance is the most common type of employer-provided life insurance, and it can be offered to small subgroups of employees based on certain employment-related factors.

Overall, while life insurance through an employer can be a valuable benefit, it is important to consider the limitations and ensure that it meets your individual needs.

Frequently asked questions