Does life insurance cover medical bills?

Fact. Many Americans are not prepared to pay for skyrocketing medical costs.

According to recent data from the Kaiser Family Foundation:

  • Four out of ten adults in the U.S. say they have difficulty affording health care costs.
  • About one-third worry about paying their monthly health insurance premium, and 44 percent are worried they can’t afford the deductible before health insurance kicks in.
  • Forty-one percent report having debt due to medical or dental bills, including money they owe to credit cards, collection agencies, family, friends, banks, and other lenders.

Although the Inflation Reduction Act promised to lower costs for some healthcare expenses, like prescription drugs and insurance premiums, consumers may still face out-of-sight costs. What can you do to help ease the pain of paying for an unexpected, long-term illness without wrecking your personal finances?

When used in addition to your health insurance coverage, life insurance can be leveraged for medical needs while you are alive. Offering “living benefits”, some policies can give you access to funds which you can use to cover hospital bills, nursing home stays, or other large healthcare expenses.

How life insurance can help cover medical expenses

Here are a few of the ways life insurance can help cover expensive medical bills if you become chronically ill:

Surrender your policy

With permanent life insurance, you can cash out the policy at any time and use the money to pay medical bills. However, there are downsides to taking this approach, including:

  • you lose your coverage.
  • you may need to pay income tax on any amount you receive that’s greater than the amount you’ve paid for the policy

Make a withdrawal

The premiums that you’ve paid into your policy can be withdrawn (tax free) and can be used to pay your medical bills. Whatever money you take out, however, will reduce the policy’s values and death benefit and possibly create adverse income tax consequences.

Borrow from cash value

If you have permanent life insurance and have built up cash in the policy, you may have the ability to access those funds to pay for medical bills. Like all loans, you will need to repay the insurance company with interest. Otherwise, your policy can lapse, or your beneficiaries can receive a lower death benefit than you initially intended. However, unlike taking a loan from a bank or other lender, the loan is not dependent on credit checks and may offer better interest rates.

Consider the benefits of various riders

Accelerated death benefit rider

Often included in life insurance policies at no added cost, an accelerated death benefit rider allows you to access your own death benefit amount if you’re diagnosed as terminally ill. Policies and coverages vary, but in general, this rider enables you to take all or part of your death benefit money to pay for critically important medical services or other necessities without siphoning cash from other savings that your spouse or family may need.

The money you take from your policy to treat a terminal illness is tax-free, and in most cases, doesn’t require you to keep receipts for how you spent the funds.

Critical or chronic illness rider

Similar to the accelerated death benefit option, some life insurance policies can let you access the money if you are diagnosed with a critical or chronic illness. The rules and definitions may vary, so it’s best to check with your insurance advisor to find out the specific terms in your actual policy.

Waiver of premium rider

This option allows you to stop paying for your life insurance premium and any riders if you become totally and permanently disabled. Of course, you’ll want to read the fine print carefully to see what conditions qualify, but typically this will prevent the policy from lapsing . . . and you could funnel the money saved from making those premiums to help pay for medical bills.

Long-term care insurance rider

Like other add-ons, this type of rider lets you unlock part or all of the death benefit provided by your policy if you need to pay for long-term medical care. Although it can be much less expensive than paying for long-term care insurance, accessing the death benefit will lower the amount that your beneficiaries ultimately receive.

What else you should know about using life insurance to cover medical bills

There are implications associated with using any of these options to cover healthcare costs. So, it’s worth repeating that living benefits typically unlock a portion of your death benefit, so using them during your own lifetime can reduce the amount that’s eventually paid to your beneficiaries.

To find out which options your life insurance may offer that can help cover medical expenses, contact your Guided Solutions team.

(citation for stats quoted at beginning)
SourceAmericans’ Challenges with Health Care Costs, KFF, July 14, 2022


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