Special Circumstances - Terminal illness



For someone diagnosed with a terminal illness, planning should begin immediately. Relevant issues include extent of health insurance coverage, disability coverage and estate planning.


Health insurance
A central question is what will be the cost of living with the illness be and what costs will be covered by health insurance. Issues to review:

  • Extent of coverage.
  • What are the lifetime maximums and are they likely to be reached?
  • Are experimental treatments covered under the policy?
  • Disability insurance - Is the individual covered under an individual or group policy or is he or she eligible for Social Security disability benefits?

Life insurance
An existing life insurance policy may be available to help cover costs associated with a terminal illness.
  • Cash value - For a policy in place for a number of years, there may be a substantial cash value that the policyholder can tap by either withdrawing it and giving up the right to a death benefit or borrowing against it.
  • Accelerated death benefit - Many life insurance contracts contain a provision that allows an insured to collect on a portion or all of a benefit amount in case of terminal illness, dread disease or other specified events. Reduces cash value and underlying death benefit of the policy.
  • Accelerated benefits received by a terminally ill or chronically ill person are excluded from gross income for tax purposes.
    • Terminally ill - A person with an illness or condition expected to result in death within 24 months.
    • Chronically ill - A person unable to perform at least two of six activities of daily living: eating, toileting, transferring, bathing, dressing and continence. Also, a person requiring substantial supervision due to severe cognitive impact.
  • Viatical settlement - Sell the policy to a third party that pays a percentage of the policy's normal death benefit. An insured meeting the definition of terminally ill can exclude viatical settlement proceeds from gross income.

Estate planning issues
  • Review and update key documents:
    • Living will - Allows person to direct how medical treatment should be rendered or withheld in terminal situations after the person becomes incompetent to make his or her own decisions. Also known as an advance medical directive.
    • Health care proxy - Names another person to make medical decisions in the event an individual is not able to do so. Also known as health care power of attorney.
    • Power of attorney - In the event of incapacity, allows another person to act on individual's behalf in legal, financial, business and other matters. Powers of attorney can be general or limited.
    • Will - If not in place, a will should be drafted to ensure individual's wishes are carried out. Should address appointment of guardians, executors and trustees.
    • Retirement plan and life insurance beneficiaries - Review to be sure they are up to date and reflect current wishes.
Non-traditional families
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