How to Use Life Insurance to Cover Medical Bills: A Comprehensive Guide

Medical bills are among the most pressing financial burdens individuals and families face today. According to a study by the American Journal of Public Health, nearly two-thirds of bankruptcies in the U.S. are tied to medical debt. With the rising costs of healthcare, many people are searching for innovative ways to cover medical expenses without depleting their savings or falling into debt. Life insurance, while traditionally viewed as a tool to protect beneficiaries after death, can be an effective financial resource during one’s lifetime to help with medical bills.

This blog post explores how you can leverage your life insurance policy to cover medical expenses, the types of policies available, and the key benefits and potential risks involved.

Understanding the Basics: Life Insurance and Medical Bills

Life insurance is primarily designed to provide financial protection to your loved ones after your death. However, modern policies often come with provisions and riders that allow the policyholder to access funds while still alive. This feature can be especially useful for covering medical bills related to chronic or critical illnesses.

There are two main ways to use life insurance to cover medical bills:

Accessing the cash value of permanent life insurance policies (such as whole or universal life insurance).

Using living benefits riders on both term and permanent policies, which allow the policyholder to receive a portion of the death benefit under specific circumstances, like a terminal or chronic illness diagnosis.

Let’s dive into each of these options in more detail.

Cash Value of Permanent Life Insurance Policies

Permanent life insurance, such as whole or universal life, offers more than just a death benefit. These policies accumulate a cash value over time, which can be accessed through loans or withdrawals. The cash value grows as you pay premiums, often on a tax-deferred basis.

How to Use Cash Value for Medical Bills:

Loans against the cash value: You can borrow against the cash value of your policy to pay for medical expenses. The loan doesn’t require a credit check or lengthy approval process, and interest rates are typically lower than traditional loans. However, the loan must be repaid, or it will reduce the death benefit.

Withdrawals from the cash value: In some cases, you can withdraw funds directly from the policy’s cash value. This reduces both the cash value and the death benefit, but it’s a simple and immediate way to access funds for medical costs.

Advantages:

Immediate access to cash: Loans and withdrawals from the cash value are often processed quickly.

No restrictions on how the funds are used: Unlike other financial assistance programs, there are no limitations on how the money can be spent. It can cover anything from surgery costs to prescription medication.

Disadvantages:

Reduced death benefit: Using the cash value reduces the amount your beneficiaries will receive after your passing.

Interest on loans: While loans against your policy are typically low-interest, they still accrue interest and will need to be repaid.

Living Benefits Riders (Accelerated Death Benefits)

A growing number of life insurance policies come with living benefits riders, also known as accelerated death benefits. These allow policyholders to access a portion of the death benefit while still alive if they meet certain conditions, such as a terminal or chronic illness.

Types of Living Benefits Riders:

Terminal Illness Rider: If you are diagnosed with a terminal illness and have a limited life expectancy (typically 12-24 months), you may be able to access a portion of your death benefit early. These funds can be used to cover medical expenses related to your treatment, palliative care, or other needs.

Chronic Illness Rider: This rider can be triggered if you are unable to perform two or more activities of daily living (ADLs), such as bathing, dressing, or feeding yourself. The funds can help pay for long-term care, nursing home costs, or in-home assistance.

Critical Illness Rider: This rider is activated if you suffer from a qualifying critical illness, such as cancer, heart attack, or stroke. It allows you to access part of your death benefit to cover medical treatments, rehabilitation, and other related costs.

How to Use Living Benefits for Medical Bills:

File a claim: If you have been diagnosed with a qualifying illness, you’ll need to file a claim with your insurance company. Once approved, you can access a percentage of your death benefit, which is usually between 25% and 75%.

Use the funds: The money can be used to pay for anything, from hospital stays to home modifications required for your illness.

Advantages:

No repayment required: Unlike loans against the cash value, living benefits are not loans and do not need to be repaid. They simply reduce the final death benefit.

Tax-free: In most cases, the funds from living benefits riders are not taxable.

Disadvantages:

Reduced death benefit: As with cash value loans, accessing living benefits reduces the amount that will be passed on to your beneficiaries.

Qualifying conditions: You must meet specific criteria to access these funds, usually related to a terminal, chronic, or critical illness.

Hybrid Life Insurance Policies for Long-Term Care

Another option for covering medical bills, particularly for long-term care, is a hybrid life insurance policy. These policies combine life insurance with long-term care coverage. If you need long-term care, you can access the policy’s death benefit to pay for those expenses. If you never need long-term care, your beneficiaries receive the full death benefit when you pass away.

How Hybrid Policies Work:

Long-term care benefits: If you require long-term care, the policy pays out a monthly benefit to cover nursing home care, assisted living, or in-home care. This amount is subtracted from the death benefit.

Death benefit: If you don’t use the long-term care benefits, the policy still provides a death benefit for your beneficiaries.

Advantages:

Dual-purpose policy: Hybrid policies offer both life insurance and long-term care coverage, providing flexibility for future needs.

Tax-free benefits: The payouts for long-term care and death benefits are typically tax-free.

Disadvantages:

Cost: Hybrid policies are generally more expensive than traditional life insurance or standalone long-term care insurance.

Limited payout: The amount available for long-term care is limited to the death benefit amount, which may not cover extended care needs.

Life Insurance Settlements (Selling Your Policy)

For those who no longer need their life insurance policy or can no longer afford the premiums, a life insurance settlement may be an option. In a life insurance settlement, you sell your policy to a third-party company in exchange for a lump sum. The buyer takes over the premium payments and receives the death benefit when you pass away.

How a Life Insurance Settlement Can Help with Medical Bills:

Sell your policy: If you are facing significant medical expenses, you can sell your life insurance policy to a settlement company. The lump sum you receive can be used to cover medical bills, and you won’t have to worry about paying future premiums.

No need for a qualifying illness: Unlike living benefits riders, a life insurance settlement doesn’t require you to have a terminal or chronic illness. However, the older and sicker you are, the more valuable your policy will be to buyers.

Advantages:

Lump sum payment: You receive a lump sum, which can be used for immediate medical expenses or any other financial need.

Disadvantages:

Reduced amount: You won’t receive the full death benefit amount; settlement offers are usually a fraction of the policy’s face value.

Loss of coverage: Once you sell the policy, your beneficiaries won’t receive any death benefit when you pass away.