The short answer
Terminal life insurance usually means one of two things. A life insurance policy you already own may let you use part of the benefit early, often called an accelerated death benefit. If you need new coverage, the option commonly available is guaranteed issue, which has a waiting period, often two years, when death from illness usually returns premiums instead.
Key takeaways
- Check any life insurance you already own first; some policies pay part of the benefit early to a terminally ill owner.
- New burial insurance policies with health questions usually ask about terminal illness, so guaranteed issue is commonly the only new option.
- Guaranteed issue policies usually pay only premiums back, often with some interest, if death from illness happens in the first two years.
- If the outlook is short, setting aside the same money in savings may do about the same job as a new policy.
- Medicare's hospice benefit covers comfort care but does not pay for a funeral.
- Veterans and service members with SGLI or VGLI may be able to receive up to 50% of the coverage early with a doctor's statement of 9 months or less to live, according to the VA.
The honest picture
We know this is a hard time to think about money. You deserve a straight answer so you can plan.
People search for "terminal life insurance" for two reasons. Some want to know what a policy they already have can do now. Others want to buy new coverage for funeral costs. This page covers both. (If you meant term life insurance, which lasts a set number of years, see burial insurance vs life insurance.)
Be wary of anyone who promises full coverage from day one after a terminal diagnosis. Ask to see the waiting period in writing before you pay.
Path 1: You already have life insurance
Find every policy first: from work, a union, a bank, a credit card or years ago. The NAIC offers a free Life Insurance Policy Locator for families after a death, but while you are living, a good step is to call each company or your employer's benefits office.
Coverage through work. The NAIC notes that if you leave an employer, you may not be able to take that life insurance with you. If illness means you may stop working, ask the benefits office before you leave whether your group coverage can continue or be converted to an individual policy, and what the deadline is.
| Option | How it works | Watch out for |
|---|---|---|
| Accelerated death benefit | Some policies let a terminally ill owner take part of the death benefit while living. The money does not have to go to medical bills. | Ask which illnesses qualify and how much will be left for your beneficiaries. |
| Policy loan | Some whole life insurance policies let you borrow against their cash value. | Unpaid loans and interest are taken out of the death benefit. |
| Viatical settlement | You sell your policy to a company for cash now. The buyer pays the premiums and collects the benefit. | You get less than the face value, your beneficiaries receive no benefit from it, and it may affect Medicaid or other benefits. |
Taxes: Under IRS rules, accelerated death benefits and viatical settlement payments are generally not taxed when a doctor certifies the person is expected to die within 24 months. Benefits: A lump sum could affect Medicaid or SSI eligibility, so ask your benefits office before taking one.
If you are a veteran or service member. The VA says people with SGLI, Family SGLI or VGLI coverage may be able to get up to 50% of the face value early, in $5,000 steps, with a doctor's written statement of 9 months or less to live. The rest goes to beneficiaries. Ask the VA about this Accelerated Benefits Option, and see veterans burial benefits for funeral help.
The Illinois Department of Insurance advises comparing a viatical offer with an accelerated benefit or policy loan from your own insurer first, and checking that any viatical company or broker is licensed in your state.
Path 2: Buying new burial insurance when terminally ill
Many burial insurance policies with health questions ask whether you have a terminal illness. A "yes" usually means those companies cannot offer a level or graded policy. That leaves guaranteed issue, which does not ask about health. It is commonly available within the company's age limits.
On many guaranteed issue policies:
- If death is from illness during the waiting period, the family usually receives the premiums paid, often plus some interest.
- If death is from an accident, the full benefit is often paid from the first day.
- After the waiting period ends, the full benefit is paid for any covered cause.
Example: a hypothetical policy has a $10,000 benefit and a two-year wait. If death from illness comes in month 12, the family receives the 12 months of premiums paid plus the stated interest. That is close to what the same money would have grown to in a savings account.
When a new policy may not make sense
- If the outlook is shorter than the waiting period, the policy will likely act like a savings account that returns what you paid. Saving the money yourself, in an account your family can reach, may do the same job with more flexibility.
- If you already have enough coverage, a new policy adds cost without much benefit.
- If the premium would strain your budget, consider a smaller amount you can keep up, since a lapsed policy no longer provides a benefit.
A new guaranteed issue policy may still make sense for someone with a longer outlook who wants a fixed amount locked in for their family. A Licensed Insurance Agent can walk through the numbers with you. See also whether burial insurance is worth it.
Hospice, Medicare and funeral costs
Medicare Part A covers hospice care when a doctor certifies a life expectancy of six months or less and the patient chooses comfort care instead of treatment to cure the illness. Hospice does not cover room and board at home or in a nursing home. Medicare does not pay for funerals.
Other ways families pay for a funeral include pre-planning with a funeral home. Read about pre-need insurance and how to pay for a funeral. Some families may also receive the one-time Social Security death payment if they qualify.
Under the FTC Funeral Rule, funeral homes must give you a price list to keep and must give prices over the phone. Pricing the funeral first helps you know how much coverage or savings you actually need. Our funeral cost calculator can help.
What to have ready and what to ask a Licensed Insurance Agent
Have ready:
- Your age and state (guaranteed issue has age limits)
- Details of any life insurance you already have, including policy numbers
- The amount you would like to leave for final expenses
- Who you want as the beneficiary
- A monthly amount you can pay comfortably
Ask the Licensed Insurance Agent: How long is the waiting period, and what exactly is paid during it? Is accidental death covered in full from day one? Given my situation, would saving the premium money do the same job?
If you are a family member helping, the person being insured usually must agree and sign the application. See burial insurance for parents. This page is general information, not medical, legal, tax or financial advice.
Common questions
What is terminal life insurance?
It is not one product. People use the term for two things: a feature on some existing life insurance policies that pays part of the benefit early after a terminal diagnosis, and new coverage bought by someone who is terminally ill. New coverage is commonly a guaranteed issue policy with a waiting period of about two years.
Can I get burial insurance if I am terminally ill?
Guaranteed issue burial insurance is commonly available, within the company's age limits, because it asks no health questions. It usually has a waiting period of about two years for death from illness. During that time, the family usually receives the premiums paid, often with some interest.
What is an accelerated death benefit?
It is a feature on some life insurance policies that may let a terminally ill owner receive part of the death benefit while living. It usually has to be on the policy already. The NAIC suggests asking which illnesses qualify and how much of the benefit will be left for beneficiaries.
Does life insurance pay out early for a terminal illness?
Some policies do. An accelerated death benefit, where a policy has one, may let a terminally ill owner receive part of the death benefit while living. Rules differ by policy, including which illnesses qualify and how much is paid. Whatever is paid early is generally taken out of what beneficiaries receive. Call the insurer and ask what your policy allows.
Can I get life insurance with stage 4 cancer?
New coverage is commonly limited to guaranteed issue, within the company's age limits, because many health-question applications ask about advanced or current cancer. It usually has a waiting period of about two years for death from illness. See burial insurance for cancer patients for how cancer is commonly treated at each stage.
Is guaranteed issue insurance worth it with a terminal illness?
It depends on the outlook. During the waiting period, many policies return premiums with some interest rather than paying the full benefit. If the outlook is shorter than the waiting period, saving the same money may do the same job. A Licensed Insurance Agent can help you weigh it.
Should I leave my diagnosis off the application?
No. During the first two years, a company can usually contest a claim over a wrong answer that mattered. Accurate answers help your family receive the benefit you planned for. Guaranteed issue does not ask health questions, so there is nothing to hide.
Can I buy life insurance on a terminally ill parent?
Usually only with the parent's knowledge and signature, and you must have an insurable interest, such as being a close family member. Guaranteed issue is commonly the available option. See our guide to burial insurance for parents for how ownership and payment work.
Does hospice pay for a funeral?
No. Medicare's hospice benefit covers comfort care, such as nursing, medicines for symptoms and support for the family. It does not pay for room and board or for funeral costs. Families usually pay for the funeral with savings, insurance or other planning.
Sources
- NAIC: Life insurance consumer information (accelerated death benefits, settlements)
- Illinois Department of Insurance: Viatical settlements and accelerated death benefits
- IRS Publication 525: Accelerated death benefits
- Medicare.gov: Hospice care coverage
- FTC: The FTC Funeral Rule
- VA: Life insurance if you are totally disabled or terminally ill (Accelerated Benefits Option)
- NAIC: Life Insurance Buyer's Guide (PDF)
- NY Department of Financial Services: Contestability (Circular Letter 2017-01)