Tapping Life Insurance When You're Terminally Ill

Pen being placed onto a life insurance policy.

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I heard that if you have been diagnosed with a terminal illness, you may be able to tap some of your life insurance death benefits in advance. Is that true?

Yes, in some cases. Many life insurance policies offer “accelerated death benefits,” which allow policyholders who have been diagnosed with a terminal illness to access a portion of the policy’s death benefit while they are still alive. These benefits may be available for both term life insurance policies, which last for a certain number of years but have no cash value, and permanent life insurance policies (such as whole life), which remain in force for as long as you pay the premiums and build cash value that you can withdraw or borrow against. In the case of a permanent life insurance policy, your accelerated death benefit may be more than the amount of cash you could withdraw or borrow under other circumstances. Regardless of whether you have a term or permanent life insurance policy, the money you receive early is subtracted from the death benefit your heirs will receive when you die.

Details vary by company, type of policy and state. If you have a whole life policy from Northwestern Mutual, for example, you can generally withdraw up to half of the death benefit, with a $250,000 maximum, if you have medical proof that you have six months or less to live. You can also access the death benefits early if you have a term policy as long as the conversion period has not expired. (For example, some term policies let you convert to a whole life policy until you reach age 50 or within the first ten years of the term.)

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New York Life policyholders can generally access 25% to 100% of their death benefits, up to $250,000, if they have medical evidence that they are expected to die within a year.

For information about other ways to access your life insurance cash values, without a terminal diagnosis, see A New Lease on Life Insurance.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.