Accessing Life Insurance Early: What Are Your Options?

Life insurance is a way to provide financial support to your family or dependents after your death. It is intended to help your loved ones when they can no longer rely on your income. The payout can be used to clear debts, pay off a mortgage, or cover everyday expenses and is usually given as a lump sum or regular payments. While life insurance is not necessary for everyone, it is particularly beneficial for those with dependents, such as children or a partner, who may struggle financially in your absence. The right time to purchase life insurance depends on individual circumstances, but it is generally more affordable when bought at a younger age.

Cancelling life insurance early

Term Life Insurance

Cancelling term life insurance is generally a straightforward process. One effective way to cancel is by stopping your premium payments. If you have automatic payments set up, you will need to contact your insurance company to end these transfers. It is recommended to call your insurance carrier directly to confirm the cancellation and ensure there are no further obligations on your part. Most insurers provide forms or online options to finalise the cancellation.

Permanent Life Insurance

Cancelling permanent life insurance, such as whole life or universal life, is typically more complex due to the inclusion of a cash value component. When you cancel a permanent policy, you may receive a payout from the accumulated cash value, but this may be reduced by surrender charges, especially if the policy is relatively new. Outstanding policy loans and withdrawals will also reduce the surrender value. Therefore, it is crucial to understand the potential financial implications before proceeding with cancellation.

Free Look Period

Regardless of the type of policy, if you have recently purchased life insurance, you are likely within the "free look" period, which typically lasts 10 to 30 days, depending on your state. During this period, you can cancel your policy without any financial penalty and receive a full refund of any premiums paid. This is a critical window to review your policy and ensure it meets your needs.

Alternatives to Cancellation

Before cancelling your life insurance policy, consider exploring alternative options. For term policies, many insurers offer a conversion rider that allows you to switch to a permanent policy without a new medical exam. For permanent policies, you may be able to use the accumulated cash value to cover premium payments or explore options like tax-free exchanges or settlements.

Reasons for Cancellation

There are several common reasons why individuals choose to cancel their life insurance policies:

• No longer needing coverage due to financial independence of dependents or the absence of significant debt.
• Changing investment strategies and seeking better returns through alternative financial vehicles.
• Inability to afford the premiums, although it is recommended to explore options for reducing coverage or premiums first.
• Switching to a different policy or insurance company that better suits your needs.

Whole-of-life policies

However, there are also some disadvantages to whole-of-life policies. They are more expensive than term life insurance, and the cash value may grow slower than with other policies. Whole-of-life policies also offer no flexibility to adjust the premium or the death benefit.

When considering a whole-of-life policy, it is important to understand the different types and how they are paid for. The most common type is level payment, where premiums remain unchanged throughout the policy. Single premium policies involve a one-time large premium payment that funds the policy for life. Limited payment policies involve higher premiums for a certain number of years, after which no more payments are required. Modified whole life insurance offers lower premiums for the first few years, followed by higher-than-standard premiums in the later years.

Term life insurance

There are several types of term life insurance policies, including level term, yearly renewable term, return of premium, guaranteed issue, and decreasing term. Level term policies have a fixed monthly payment for the duration of the policy, while yearly renewable term policies cover one year at a time with the option to renew. Return of premium policies refund all or a portion of the premiums if the policyholder survives the term, but the premiums are significantly higher. Guaranteed issue policies do not require a medical exam and ask only basic health questions, but the premiums are higher as the insurance company assumes a higher risk. Decreasing term policies are specialised for covering mortgage obligations, with both the premium and death benefit payout decreasing each year.

When deciding on the term length, it is recommended to choose a term that covers dependent children through their education. The longer the term, the higher the monthly cost for a given coverage amount. It is generally easier and more cost-effective to obtain insurance at a younger age and in good health.

Critical illness cover

Critical illness insurance provides a tax-free lump-sum payment to the policyholder upon diagnosis of a critical illness. This payment can be used to cover any expenses, including medical costs, mortgage payments, childcare expenses, transportation, and more. It helps to alleviate the financial burden that an unexpected illness can bring, allowing the policyholder to focus on recovery.

When considering critical illness insurance, it's important to review the specific terms and conditions, as different policies may have varying exclusions and restrictions. Additionally, critical illness cover may not be eligible for certain term life products, and there are usually age restrictions, such as being under 55.

Critical illness insurance can be purchased directly from an insurer or through an employer-provided plan. It is a valuable tool to help reduce the financial impact of a serious illness and ensure that you have the necessary funds to focus on your health and recovery.

Terminal illness cover

A terminal illness diagnosis can be devastating, and you may be concerned about the financial future of your loved ones. It is important to know that a terminal illness does not prevent you from buying life insurance. However, your options are limited.

Guaranteed Issue Life Insurance

The only type of life insurance you can buy if you have been diagnosed with a terminal illness is guaranteed issue life insurance. This is because life insurance carriers are in the business of risk assessment, and a terminal illness represents a high level of risk.

Guaranteed issue policies are simple and straightforward. They are usually modest in size, with most capping at $25,000, but some policies can go up to $40,000. You can also consider stacking multiple guaranteed issue policies to increase the total death benefit.

The application process for guaranteed issue life insurance is simple and can be done from the comfort of your home. It does not include a medical exam, and there are no health questions. You will only need to provide basic information such as your social security number and beneficiary information.

Accelerated Death Benefits

Some life insurance policies contain an accelerated benefits clause, allowing the policyholder to receive benefits before death. In the case of a terminal, chronic, or critical illness, the policyholder can draw against the face value and become a beneficiary of their own life insurance policy. Normally, accelerated benefits are reserved for policyholders who are terminally ill or have a long-term, high-cost illness. Anywhere from 25% to 100% of the death benefit may be paid out early, usually as a lump sum but sometimes in monthly instalments.

Accelerated benefits can be used for any purpose and are usually tax-exempt for individuals expected to die within two years. They can also supplement a long-term care policy. However, they may impact the eligibility of the policyholder and their spouse for Medicaid benefits, especially in the case of a lump-sum payment.

Viatical Settlement

A viatical settlement is another option for someone with a terminal illness. With this option, the policy is sold to a third party, and the policyholder receives a lump sum payment. The major difference between this and accelerated death benefits is that, in a viatical settlement, the purchaser of the policy takes over the monthly payments, whereas with accelerated death benefits, the policyholder must continue to pay the premiums.

Death Benefit Loan

A death benefit loan is a low-interest loan where the policyholder borrows against the cash value of the life insurance policy. The policyholder can choose to repay the loan at their own rate, or the loan amount plus interest can be deducted from the death benefit after the policyholder dies.

Graded Benefit

Guaranteed issue life insurance typically includes a graded benefit, which means that the death benefit will not be fully paid until a specific time period has passed, often two or three years. If you die during the graded period, either your premiums will be returned, usually with interest, or a percentage of your death benefit will be paid. If you outlive the graded period, your beneficiaries will receive the full death benefit.

Sample Quotes for Terminally Ill Life Insurance

Premiums for guaranteed issue policies are high relative to the amount of coverage. This is because premiums are based on risk, and a terminal illness represents a substantial amount of risk. However, if this is the only type of coverage you qualify for, the policy can still make a significant difference for your loved ones.

• Life Insurance Quotes For Terminally Ill Male: $902.91 (subject to change)
• Life Insurance Quotes For Terminally Ill Female: $752.91 (subject to change)

Frequently asked questions