Life insurance is a critical financial tool designed to provide financial security and peace of mind to policyholders and their beneficiaries. However, purchasing life insurance for someone who is terminally ill or already dying presents unique challenges and complexities. This article will explore the nuances of buying life insurance for someone who is dying, including the feasibility, ethical considerations, types of policies available, and potential alternatives.
Understanding Life Insurance and Its Purpose
Life insurance policies are contracts between an insurer and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. The primary purpose of life insurance is to provide financial protection to the policyholder’s dependents and cover expenses such as funeral costs, debts, and lost income.
Feasibility of Buying Life Insurance for Someone Who Is Dying
Insurability and Underwriting
Life insurance companies assess the risk of insuring an individual through a process called underwriting. This involves evaluating the applicant’s health status, age, lifestyle, and other factors. For someone who is terminally ill, the underwriting process becomes particularly stringent, as insurers are less likely to issue a policy to someone with a high probability of imminent death.
Guaranteed Issue Life Insurance
One of the few options available for terminally ill individuals is guaranteed issue life insurance. These policies do not require medical exams or health questions, making them accessible regardless of the applicant’s health condition. However, guaranteed issue policies come with significant limitations, including:
- High Premiums: The premiums for guaranteed issue policies are considerably higher compared to standard life insurance policies due to the increased risk the insurer is taking.
- Graded Death Benefit: Many guaranteed issue policies have a graded death benefit, meaning the full death benefit is not available until the policy has been in force for a certain period (usually two to three years). If the insured dies during this period, the beneficiaries may only receive a refund of the premiums paid plus interest.
Accidental Death Insurance
Accidental death insurance is another type of policy that might be available. However, these policies only pay out if the insured dies as a result of an accident, not from natural causes or illness. Therefore, they may not be suitable for someone who is terminally ill.
Ethical and Practical Considerations
Ethical Concerns
The ethical considerations of buying life insurance for someone who is dying are significant. Insurers must balance the need to provide financial protection with the risk of adverse selection, where individuals only seek insurance when they anticipate a claim. This could potentially lead to higher premiums for all policyholders.
Financial Impact on Loved Ones
While the primary goal of life insurance is to ease the financial burden on loved ones, purchasing a high-premium policy for someone who is dying may not always be the most practical solution. The cost of premiums might outweigh the benefits, especially if the policy includes a graded death benefit.
Transparency and Consent
Transparency and consent are crucial when buying life insurance for someone who is dying. The insured individual must be fully aware of and consent to the policy being purchased. This ensures that all parties involved understand the terms and conditions, avoiding potential legal and ethical issues.
Alternatives to Life Insurance for Terminally Ill Individuals
Living Benefits from Existing Policies
Some life insurance policies include living benefits, also known as accelerated death benefits, which allow the policyholder to receive a portion of the death benefit while still alive if they are diagnosed with a terminal illness. This can provide much-needed funds for medical expenses and other needs.
Viatical Settlements
A viatical settlement involves selling an existing life insurance policy to a third party for a lump sum payment. The payment is typically less than the death benefit but more than the cash surrender value. This option can provide immediate financial relief for medical expenses and other needs.
Final Expense Insurance
Final expense insurance, also known as burial insurance, is designed to cover funeral costs and other end-of-life expenses. These policies are usually easier to obtain than traditional life insurance, even for individuals with serious health conditions. However, the coverage amounts are generally lower.
SEE ALSO: What is a Guaranteed Universal Life Insurance Policy?
Savings and Investments
For some, using savings or investments to cover end-of-life expenses might be a more practical approach. This can provide immediate access to funds without the complications of obtaining a new insurance policy.
Case Studies and Real-Life Scenarios
Case Study 1: Guaranteed Issue Life Insurance
Sarah, a 68-year-old woman diagnosed with terminal cancer, explored her options for life insurance. Traditional policies were not available due to her health condition, so she opted for a guaranteed issue policy with a graded death benefit. Although the premiums were high, Sarah felt it was important to leave something for her grandchildren. Unfortunately, she passed away within the two-year graded period, and her beneficiaries received a refund of the premiums paid plus interest, which was significantly less than the anticipated death benefit.
Case Study 2: Viatical Settlement
John, a 62-year-old man with advanced ALS, had an existing life insurance policy with a $500,000 death benefit. Facing mounting medical bills, he decided to sell his policy through a viatical settlement. He received a lump sum payment of $350,000, which he used to cover his medical expenses and improve his quality of life during his remaining time.
Conclusion
Purchasing life insurance for someone who is dying is fraught with challenges and complexities. Traditional life insurance policies are generally not available for terminally ill individuals due to the high risk involved. However, options like guaranteed issue life insurance, accidental death insurance, living benefits, viatical settlements, and final expense insurance can provide some level of financial support.
When considering life insurance for someone who is dying, it is crucial to weigh the costs, benefits, and ethical implications carefully. Exploring all available options and seeking advice from financial and insurance professionals can help ensure that the best possible decision is made for the individual and their loved ones.
