Can You Get Life Insurance if You Have a Terminal Illness?


When a big storm heads in your direction, you often get a warning and time to prepare. That may mean stocking up on bottled water, getting more groceries, or buying a first aid kit. The dire predictions create an incentive to act—even if the storm doesn’t arrive with the forecasted severity. But when you find out you have a terminal illness, what do you do?

The conundrum

You’re required to have car insurance but not life insurance so it’s common to procrastinate. You must qualify for life insurance before you need it. The problem is the lack of real motivation to buy earlier. Who wants to think about death and disease anyway? Waiting until tomorrow seems as good as acting today.

When you’re ready

Insurance companies aren’t obligated to offer you coverage and premiums are based on your risk of dying. If you have a terminal illness, who would want to insure you at any price? You’ll likely find that:

  • you’re uninsurable; or
  • you’re “rated” or “substandard,” which means you’ll have to pay higher premiums.

The underwriting process takes weeks or months. That’s where the insurer decides whether to offer you coverage and determines the price. If you’re offered a policy at a price you’re willing to pay, your health can’t have changed between the time you apply and the time you take delivery.

Adverse selection or Anti-selection

If you’re motivated to buy, insurance companies may get suspicious. Do you know something about your health you don’t want them to find out? When people falsify or conceal information to an insurer, it’s called adverse selection or anti-selection.

The insurance application and underwriting process is designed to spot the withholding or misstatement of information. Fraud voids the contract even if it’s discovered years later. That’s a reason to answer the questions honestly.

Post-recovery

If you’ve recovered from a serious condition like a stroke, you may want life insurance. Before you apply, find out if you’re insurable and what surcharges may apply. Since companies differ in their criteria, contacting multiple insurers will give you more options. Your advisor can ask on your behalf and maintain your anonymity.

Be proactive

If a terminal illness develops after you buy, you can see the benefits of life insurance while you’re alive.  You’ll be able to help others financially when you’re no longer here.

If your health deteriorates, the cost of getting new coverage increases. You may not be offered protection at any price. If you have life insurance through your employer or an association, keep it.

Early death benefit

If you have life insurance and death is near, the insurance company may be willing to advance a portion of the death benefit to you to help with expenses. This is a sign of goodwill and rarely a contractual right. Even if it’s available, someone needs to contact your advisor or the insurance company. At a stressful and emotional time, this is easily forgettable.

Alternatives

If you need money, you may be able to use a life settlement. This means selling your life insurance to an institutional investor for a price based on the actuarial fair market value of your contract. The investor pays the premiums and collects the death benefit. Life settlements are currently available in four provinces (New Brunswick, Nova Scotia, Quebec, and Saskatchewan) but illegal in the rest.

If you’re not insurable, you may be able to buy a life settlement. That means buying the existing coverage of someone with a similar life expectancy. This option will likely be expensive, if available.

The bottom line

The best strategy is to get life insurance before you need it. When you’re young and healthy, the costs of buying insurance will be a lot less expensive.

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Flickr: David Hilowitz