Many Americans today are facing the reality of rising medical expenses — despite having health insurance.
Whether it’s an emergency, long-term care, managing a serious illness, or even starting a family, medical bills can quickly add up. Even basic care is becoming more difficult to afford for many families. But there’s a way to ease the financial impact of high medical costs: life insurance.
While life insurance is usually seen as a way to support your loved ones after you’re gone, some policies actually offer benefits that can help with medical expenses while you’re still around. Let’s take a look at how life insurance may be able to help cover those medical bills.
Connection Between Life Insurance and Medical Expenses
At its core, life insurance is designed to provide a payout to your designated beneficiaries after you’ve passed away. This is called a death benefit — money to help family members manage day-to-day financial obligations after you’re gone.
However, many life insurance policies come with more than just a death benefit.
Some modern policies offer what are called living benefits— features that allow you to access a portion of your death benefit while you’re still alive. These living benefits can be used to cover necessary medical costs, making life insurance a potential lifeline when facing serious health issues.
Living Benefits and Policy Riders
Living benefits typically come in the form of life insurance ‘riders,’ which are optional add-ons that can be attached to your life insurance policy. These riders can provide critical financial support during some of life’s most difficult moments.
While living benefits and policy riders can be a lifeline, it’s important to know that the money accessed while you’re alive will reduce the amount available for your beneficiaries when you pass.
Here are a few common riders that may help with medical expenses:
Accelerated Death Benefit
An accelerated death benefit rider allows you to access a portion of your death benefit if you are diagnosed with a terminal illness. For example, if you’re diagnosed with stage four cancer and given a limited time to live, the accelerated death benefit lets you use part of your policy’s payout to cover real-time medical expenses, hospice care, or other end-of-life costs.
Chronic Illness
A chronic illness rider provides financial support if you are diagnosed with a permanent chronic condition that prevents you from performing at least two activities of daily living (ADLs) — bathing, dressing, eating, toileting, transferring, and continence — or requires substantial supervision due to cognitive impairment. Unlike the long-term care rider, the chronic illness rider usually requires the condition to be irreversible.
For example, if you develop a long-term condition, like Parkinson’s disease or Alzheimer’s, you can use this rider to cover medical care and services that help you manage your condition. Depending on your policy, this can include medical equipment, like walkers, wheelchairs, and other assistive devices.
Critical Illness
If you’re diagnosed with a serious illness, like a heart attack, stroke, or cancer, the critical illness rider provides a lump sum payout to cover medical costs related to your illness. For instance, if you have a heart attack and need surgery and extensive rehab, this rider could help cover out-of-pocket costs not covered by your health insurance. This type of coverage is crucial for people who may face high medical bills due to unexpected and/or serious illnesses.
Long-Term Care
If you’re facing the need for long-term care, such as staying in a nursing home, an assisted living facility, or receiving in-home care, the costs can be prohibitively expensive. Having a long-term care rider attached to your policy can provide financial support to cover a portion of the costs of this care. To qualify, you typically must be unable to perform at least two out of six ADLs or have severe cognitive impairment.
Accessing Cash Value in Permanent Life Insurance
Unlike life insurance living benefits, which provide access to part of your death benefit due to a qualifying event, like a serious illness, cash value is a separate asset that builds over time in permanent life insurance policies (like whole life or universal life). It’s not tied to your death benefit and can be accessed while you’re still alive.
The way cash value life insurance grows depends on the type of policy. Whole life policies offer steady, guaranteed growth, while universal life policies provide more flexibility, often tied to interest rates or market performance. Over time, this cash value can become a valuable financial resource, helping with unexpected expenses, including medical costs, when you need it most. It’s like a built-in savings account that grows within your policy, offering a way to access funds for various needs without affecting your death benefit.
There are three main ways to tap into your policy’s cash value:
- Policy loans
With a policy loan, you can borrow against the cash value of your permanent life insurance policy. The loan typically comes with a low interest rate, and you can use the funds for anything, including medical expenses. Just remember, if you don’t repay the loan, the amount you borrowed (plus any interest) will be deducted from your death benefit. This can affect the financial support your beneficiaries receive, so it’s important to stay on top of repayment. - Withdrawals
Another option is to withdraw money from the accumulated cash value of your policy. Withdrawals are tax-free up to the amount you’ve paid into the policy. However, like policy loans, withdrawals will reduce your death benefit, meaning your beneficiaries will get less. It’s a good idea to carefully consider how much you take out, as it can affect the financial support you’re leaving behind. - Policy surrender
If your policy is no longer needed or you’re facing a financial emergency, you can choose to surrender your policy and access its cash surrender value. This means you’ll get the cash value of your policy, but keep in mind that doing so will terminate your coverage, and you’ll lose your death benefit. It’s typically seen as a last resort, but if other funding options aren’t available, it can provide immediate access to cash.
Life Insurance and Medical Bills: Considerations and Potential Drawbacks
Using life insurance to help with medical bills can be a great option, but you’ll want to think things through before you make that move. While it can provide quick financial relief, taking money out of your policy can reduce the amount left for your loved ones when you’re gone. It’s also good to be aware of any fees or restrictions that might apply. So, before accessing your policy, take some time to understand how it might impact your long-term plans and make sure it’s the best choice for your current needs.
Here are a few things to keep in mind before tapping into your policy:
Impact on death benefits
Any living benefits you take from your life insurance policy will reduce the death benefit your beneficiaries receive when you pass away. If keeping the full death benefit intact is important for your family’s financial security, you might want to reconsider using these benefits. It’s a good idea to think about your long-term goals and weigh whether accessing this money now will leave your loved ones with enough support down the road.
Tax implications
Depending on how you use the funds, there could be tax consequences. For instance, loans and withdrawals may not be taxable, but if you decide to surrender your policy, you might have to pay taxes on any gains you’ve made. It’s always helpful to check in with a tax professional or financial advisor before making any decisions to avoid any surprises come tax time.
Policy terms and conditions
Not all life insurance policies include living benefits, and the ones that do may have certain conditions and limitations. It’s important to be aware of precisely what your policy offers and any restrictions that might apply. If you’re unsure, a financial advisor can help clarify the details and guide you to the best options based on your needs.
Make sure you’re covered—today and in the future
Interestingly, more and more people in their twenties are considering life insurance plans, and since policy premiums can be as low as $7 a month, why not?
Life insurance isn’t just about leaving a legacy—it can also be a powerful tool for managing medical expenses when you need it most.
Understanding your policy’s living benefits, riders, and cash value options is key to making informed decisions—especially if you’re considering using life insurance for medical bills. It’s very important to know how this could impact your death benefit, taxes, and policy terms. The Baldwin Group is here to help with personalized guidance and coverage options.
