Compliments of The Litherland, Kennedy & Associates, APC, Attorneys at Law
Written By: The American Academy of Estate Planning Attorneys
Few things in life are more devastating than watching a loved one struggle with a long-term or terminal illness. It can be one of the most helpless feelings ever experienced. While that’s overwhelming enough, there are medical bills and other costs which must be paid. Fortunately, life insurance policies are one option that can ease the financial burdens and eliminate unwanted distractions.
There are several ways life insurance policies can help.
For some, taking a “cash value” loan on their permanent policy (also referred to as whole life, variable life or universal life policies) is an option. Depending on how long you’ve had the policy, you likely have a portion of it that has become liquid, which would allow you to take out a loan. This could be a significant amount of money depending on how long you’ve had the policy. Remember, this is a loan, so there are interest rates, although competitive. In some cases, the loan may not be due until after the policy owner’s death, but instead, would be deducted from the insurance policy payout. Any remaining funds would then be paid to the owner’s beneficiaries.
Another option is taking the “surrender value” of a permanent policy. Instead of taking a loan on the policy, instead many will accept a sum of money, the “surrender value,” and cancel the policy. Again, the amount is determined on how long you have had the policy and other factors. Also, remember that the face value of the policy could be substantially higher than the surrender value.
There are policies with provisions allowing for a portion of the face value to be paid if the insured becomes terminally ill. These provisions are known as “living benefits” or “accelerated death benefits.” This will require a statement from the patient’s physician stating the patient is expected to pass away within a short span, usually 24 months. This may be part of the policy you have and you should speak with your insurance provider. Note, too, these are generally tax-free.
Finally, you may wish to use a life insurance policy as part of a “viatical settlement” option. A policy holder may wish to sell their policy to a third party for a portion of the face value of that policy. This option might have challenges as well and it’s important to understand what those challenges might mean. This is sometimes an option, even for those policies that do not accrue cash value. Be sure to “conduct due diligence,” i.e. research fully and speak with your CPA before making this decision since it could have repercussions for your collective financial situation.
There are an array of challenges associated with terminal illness. For one, the emotional and financial weight of the grief is simply inexplicable. Anything we can do to ease those overwhelming emotions and financial burdens is a good thing. This article helps to bring awareness to some of the available options. The key to planning for the future is always to prepare for the unknown.
Our firm is a member and designated Fellow of the American Academy of Estate Planning Attorneys, for more information or to attend an upcoming seminar, please give our office a call at (408) 356-9200 or (831) 476-2400.