A cancer diagnosis can be devastating, both emotionally and financially. In addition to the physical and emotional toll, treatment costs can quickly add up. Life insurance can provide important financial protection for yourself and your family in the event of a cancer diagnosis. Here’s an in-depth look at how life insurance cancer payouts work.
How Life Insurance Covers Cancer
Life insurance policies provide a death benefit payout to your named beneficiaries in the event of your passing. This payout can help cover final expenses, daily living costs for dependents, and more. Many life insurance policies also include accelerated death benefits specifically for terminal illnesses like cancer.
An accelerated benefit allows you to access a portion of the death benefit while still living. This money can then be used to help pay for medical treatments, supplement lost income, or cover any other needs. The death benefit amount paid to beneficiaries is then reduced by the amount already paid out through the accelerated benefit.
Qualifying for Accelerated Benefits
In order to qualify for accelerated benefits under a life insurance policy, the insurance company will require proof of diagnosis. This usually involves providing medical records and having your doctor complete forms about your condition and prognosis.
The specifics on accelerated benefit eligibility differ between insurance companies. But in general, you must be diagnosed with a terminal illness that is expected to result in death within 12-24 months. Cancer is one of the most common conditions that allows access to accelerated benefits.
Some policies have a waiting period before accelerated benefits can begin. This is usually around 30 days from the time you submit your claim. There may also be a maximum payout limit, such as 50% of the total death benefit.
How Much is Paid Out
The amount paid out through an accelerated benefit will depend on your specific policy and the payout option you select. Most insurers provide two options when it comes to accelerated cancer benefits:
- Lump Sum Payout – This option provides a single lump sum upfront based on the maximum payout percentage allowed by your policy. This allows immediate access to funds to cover pressing expenses.
- Monthly Installment Payout – Rather than one lump sum, this option pays out benefits in monthly installments. The total payout amount is spread out over time. This can provide ongoing supplemental income during treatment.
Additionally, some policies allow access to 100% of the death benefit upon terminal diagnosis. Others cap payouts at 50% or lower. Be sure to review your individual policy details to understand options and limits.
Other factors impacting total payouts include the death benefit amount, your remaining life expectancy at diagnosis, and whether funds are being accelerated for medical versus non-medical costs.
Using Accelerated Benefits
The accelerated payout funds can be used for any purpose. Common uses include:
- Paying for medical treatment and medication costs
- Covering home health care and assisted living expenses
- Replacing lost income from being unable to work
- Paying for experimental treatments not covered by health insurance
- Covering household bills and everyday living expenses
- Paying down debts to minimize financial stress
- Funding bucket list trips and experiences with loved ones
Having access to funds during an extraordinarily difficult time can help relieve some financial worries. This allows you to focus your energy on treatment, family, and your quality of life.
Impact on Life Insurance Policy
When you accept an accelerated benefit payout, it does reduce the death benefit policy amount for beneficiaries. Each dollar paid out equates to one less dollar later paid to your beneficiaries upon death.
Some policies allow you to keep a reduced death benefit in place. For example, if you accept 50% accelerated payout you can maintain a death benefit at 50% of the original amount for beneficiaries.
Other insurers completely terminate the policy upon accelerated payout. There is no residual death benefit after accepting an accelerated cancer payout.
If you want accelerated access but also wish to maintain a full death benefit, some insurers allow you to take out a loan from the policy instead. This provides funds upfront but the full death benefit remains intact.
Before moving forward with any accelerated benefit option, discuss the lasting policy impacts with your insurance provider. Make sure your beneficiaries will retain adequate death benefits should you pass away.
Applying for Accelerated Benefits
The application process for accelerated cancer benefits involves:
- Contacting your life insurance provider and requesting claim forms
- Working with your physician(s) to complete the necessary medical documentation
- Submitting proof of terminal diagnosis along with policy information
- Selecting your desired payout option (lump sum or installment)
Insurers will request medical records related to diagnosis, treatments received, prognosis, and life expectancy estimates. Lab reports, test results, clinical notes, and letter from doctors are all important.
Some insurers may request an independent second medical opinion at their own cost. This helps validate the seriousness of your condition.
Processing times vary between companies. But most aim to deliver benefits within 30 days from receiving a completed claim with supporting details.
If you qualify based on medical diagnosis, benefits are almost always paid out. Appeal options may be available if your claim is initially denied.
There are no federal taxes on accelerated life insurance benefits if funds are used for qualified medical expenses. These include treatment costs, medications and devices, home health care, special transportation services, and more.
If accelerating benefits for non-medical costs, payouts may be considered taxable income. You’ll get a 1099 form reporting funds received and taxes may apply depending on your personal situation. Ask a tax professional to understand potential tax obligations.
Accelerated Benefits for Specific Cancers
Different types of cancer and stages impact prognosis and life expectancy. Insurers evaluate each case individually to determine qualification for accelerated benefits.
Some of the most common cancers that may result in approval of accelerated benefits include:
- Stage 4 lung cancer – Lung cancer is one of the most deadly cancers. By stage 4, five year survival is under 10%.
- Stage 4 pancreatic cancer – Pancreatic cancer also has very low survival rates once progressed to stage 4.
- Stage 4 liver cancer – Liver cancer prognosis is very poor at stage 4. Without a transplant, life expectancy is measured in months.
- Stage 4 stomach cancer – Stomach cancer is aggressive and deadly at stage 4. Life expectancy is less than a year.
- Stage 4 brain cancer – At stage 4, glioblastoma brain cancer is terminal with very short expected survival times.
- Stage 4 esophageal cancer – Esophageal cancer is devastating at stage 4 with median life expectancy of around 4-8 months.
Of course, factors like cell type, grade, treatment response, age, and health impact life expectancy. But in general, stage 4 cancers have poor prognoses that can qualify for accelerated benefits.
Additional Living Benefit Riders
In addition to built-in accelerated benefits for terminal illness, some life insurance policies offer extra living benefit riders. These provide early payout options for critical illnesses like cancer, heart attack, stroke, and major organ failure.
Riders give you access to a portion of the death benefit while living for specified medical conditions. Some common options include:
- Critical Illness Rider – Pays 20-50% of death benefit for diagnosis of major illness such as cancer.
- Dread Disease Rider – Provides payout for diagnosis of specified terminal diseases. Cancer is always included.
- Quality of Life Rider – Gives access to death benefit for inability to independently perform activities of daily living.
These riders come at an added cost but can provide supplemental payout options beyond the standard accelerated terminal illness benefit. They can make your life insurance even more valuable in the event of cancer.
Should You Inform Your Life Insurer?
If you’re diagnosed with cancer after purchasing life insurance, you’re not obligated to inform your life insurance company right away. However, be sure to read any reporting requirements in your policy documents.
Some policies have a “material change” clause requiring you to inform them of major health developments like a cancer diagnosis. If you fail to report and die within two years, they may not honor the death benefit payout.
Even without specific reporting requirements, it can be smart to notify your insurer if pursuing accelerated benefits. This opens the claims process and allows you to access funds sooner.
Informing your insurer of a cancer diagnosis does not automatically trigger cancellation of your coverage. Most policies will continue unchanged, though premiums may rise. Discuss options openly with your provider.
Shopping for Cancer-Friendly Life Insurance
If applying for new life insurance after a cancer diagnosis, it’s important to find a carrier catering to higher risk individuals. Some tips include:
- Look for policies with generous accelerated benefit offerings. This includes higher maximum payouts and more comprehensive qualifying conditions.
- Consider guaranteed issue life insurance which does not require a medical exam. This makes it easier to qualify.
- Seek policies from insurers specializing in higher risk and senior life insurance. They’re more likely to approve those with health conditions.
- Be prepared to pay higher premiums compared to preferred-plus applicants with clean medical histories.
- Work with an experienced independent broker representing multiple carriers. They can help you compare options and improve chances for approval.
While shopping around, be sure to disclose your cancer history upfront. This avoids issues with declined claims down the road due to failure to disclose medical issues.
A cancer diagnosis leads to emotional and financial challenges. Life insurance policies with accelerated death benefits can provide funds when you need them most. These payouts help cover urgent costs while preserving a portion of the death benefit for beneficiaries.
When reviewing policies, look for cancer-friendly features like generous accelerated payout rates, additional living benefit riders, and quality of life triggers. Seek out knowledgeable brokers able to match you with receptive carriers. And inform insurers promptly if diagnosed after purchasing a policy.
Life insurance delivers invaluable peace of mind. Taking time to understand accelerated benefit options for cancer can help protect both you and your family during difficult times. With proper planning, life insurance can help provide stability when you need it most.