The Unwritten Chapter: Options for Your Life Insurance Policy when you're living with a really, long term life threatening illness
When you're diagnosed with a chronic illness, your world shifts. Amid the emotional upheaval and the unexpected costs of budgeting for the costs of the new medical realities, the last thing you need is another source of stress. But for some, that's what their life insurance policy becomes: a monthly bill you wonder should you continue to pay, in a future that's now less predictable?
Read in this article
- A Tale of Two Timelines: What happens to your life insurance policy when you're living with a Prognosis or a Possibility?
- Diving into the stark financial differences between a marathon and a sprint
- Living with a Manageable Chronic Health Condition
- Living with a diagnosis that's Life threatening, today
- Living with a life-impacting long term disease diagnosis, that's not currently terminal?
- A Bridge to Your Legacy: Rethinking Life Insurance When It Matters Most
- Frequently Asked Questions: Chronic Illness & Policy Sustainability
- What is the real-world difference between a financial 'sprint' and a 'marathon'?
- I'm struggling to afford premiums; what are my options besides letting the policy lapse?
- How does 'Life Co-Ownership' actually work?
- Is selling my policy for a lump sum better than co-ownership?
- How does the Terminal Illness Benefit work in Australia?
- Sources & Further Reading
A Tale of Two Timelines: What happens to your life insurance policy when you're living with a Prognosis or a Possibility?
Receiving a terminal illness diagnosis is a profoundly challenging experience.
After the first wave of emotion crashes over you and your family, it's then often a scramble to look for practical considerations and for decisions to make, while we're still in a healthy enough mindspace and still have the financial capacity to do so.
For folks with modern life insurance policies that provide a terminal illness benefits, this often is the trigger to begin the early claim payout process with your Sapience Financial advisor.
But for those folks whose chronic illness is life threatening, but not to the level of currently terminal, that's a different set of questions to answer, and should never be faced alone.
Case Study: Both John and his partner Terry have always loved the Australian beach and outdoors lifestyle, and both lived the beach surf culture while growing up in their teens (during the time where SPF 15 Plus Sunscreen was not a 'cool thing'). Today, after being offered a free skin cancer test at the local GP's clinic, both have received life changing, bad news.
- John has received a diagnosis of an aggressive cancer resulting in a reduced life expectancy of possibly 24 months to live, after a melanoma was found hidden in his hairline, spread into his neck.
- Terry has received a cancer diagnosis but her condition is in remission. But if we've having honest conversations here - the outcome is not looking good for the long term stability of her health.
Both John and Terry have a life changing diagnosis; one is life threatening now, one is life changing and potentially will change to life threatening, later.
Both have hard decisions to make now. Both have very different financial roads to navigate. Both have life insurance policies in force.
Diving into the stark financial differences between a marathon and a sprint
From a personal finance perspective, navigating a long-term chronic illness, versus, a terminal diagnosis, presents two fundamentally different financial journeys. Drew Browne Sapience Advisor
Living with a Manageable Chronic Health Condition
Living with a manageable, yet life-impacting chronic condition, like HIV or MS, often becomes a financial marathon.
- The primary challenge is sustainability: managing potentially reduced work capacity, funding ongoing treatment and specialist care over many years, and carefully budgeting for a long but financially constrained future.
Here, financial tools like income protection and long term disability insurances (and access to social security such as the Disability Support Pension) are key.
Living with a diagnosis that's Life threatening, today
In stark contrast, receiving a terminal diagnosis triggers a financial sprint to the finish line.
- This is where a life insurance policy's terminal illness benefit becomes critical, providing an immediate, tax-free lump sum payment upon diagnosis (typically when life expectancy is less than 24 months).
The financial focus abruptly shifts from long-term management to immediate allocation: clearing debts, funding palliative care and final wishes, and distributing remaining assets to ensure loved ones are provided for.
Living with a life-impacting long term disease diagnosis, that's not currently terminal?
Living with a long term life-impacting chronic health conditions can feel like being caught between difficult news, and bad news. Most serious long term illnesses, are life impacting but not currently terminal.
The practical financial implications may be:
- what to do with a reduced level of income, and
- what to do with a number of life insurance policies that are good to have, but are becoming increasingly expensive to keep in force.
Certainly, they will provide a future benefit if the severity of a condition were to accelerate or become classed as 'terminal,' and these life insurance policies will be part of your financial provision for your loved ones - at some undefined future date - but the policy premiums still have to be paid today to keep the policy open.
The good news is, for folks facing a long term chronic illness and who may have financial concerns over the sustainability of a life insurance policy, a commercial policy co-ownership option may be a consideration.
A Bridge to Your Legacy: Rethinking Life Insurance When It Matters Most
Here is a breakdown of some of the the key options available to you, each with its own distinct advantages and disadvantages:
| Option | How it Works | Pros | Cons |
|---|---|---|---|
| Life Co-Ownership | A third party takes over premium payments of a policy in exchange for a share of the final payout with a portion reserved for the estate from a future payout. | - Eliminates the burden of premium payments. - Beneficiaries still receive a portion of the benefit. - Policy does not lapse. | - The full benefit is not paid to your beneficiaries. - The co-ownership company receives a share of the payout. |
| Terminal Illness Benefit | An advance payout of your death benefit upon diagnosis of a terminal illness. | - Receive a lump sum of money to use as you wish. - Provides immediate financial relief. | - The full death benefit may be reduced by the amount of the advance. |
| Selling Your Policy | Selling your policy outright to a third party for a lump sum. | - Receive a lump sum of cash. | - You no longer own the policy. - Your beneficiaries will not receive any payout upon your death. |
Frequently Asked Questions: Chronic Illness & Policy Sustainability
What is the real-world difference between a financial 'sprint' and a 'marathon'?
A terminal diagnosis triggers a sprint, where the focus is on an early claim payout to clear immediate debts and fund final wishes. A long-term chronic illness is a marathon; the challenge is the sustainability of paying premiums and medical costs over many years on a reduced income while the condition is not yet classified as "terminal."
I'm struggling to afford premiums; what are my options besides letting the policy lapse?
Letting a policy lapse means losing years of investment and protection. For those caught in the "marathon" of illness, Life Co-Ownership is a powerful alternative. It allows you to keep the policy active without paying the premiums yourself, ensuring your beneficiaries still receive a financial legacy rather than zero dollars if the policy were to be cancelled.
How does 'Life Co-Ownership' actually work?
In a co-ownership arrangement, a third party assumes the responsibility of paying your insurance premiums. In exchange for this cost-coverage, they receive a share of the final payout. This removes the immediate bill from your life while preserving a significant, predetermined portion of the benefit for your loved ones. It is a bridge that secures your legacy when you can no longer fund it yourself.
Is selling my policy for a lump sum better than co-ownership?
Selling your policy outright (a viatical settlement) provides a cash lump sum today but ends your coverage completely—your beneficiaries receive nothing. Co-ownership is designed to preserve the original intent of the policy. It solves the cash flow problem of premiums while ensuring your family still receives a substantial death benefit later.
How does the Terminal Illness Benefit work in Australia?
This benefit is an advance, tax-free payout of your death benefit. It is typically triggered if you are diagnosed with an illness where your life expectancy is less than 24 months. It is not automatic; you must initiate the claim. It provides immediate liquidity to provide for your family and manage final medical costs during a difficult time.
Sources & Further Reading
- Australian Taxation Office (ATO) on Terminal Medical Conditions: This government source defines the specific criteria (eg. a 24-month life expectancy) required to access superannuation and insurance benefits on terminal illness grounds, supporting the article's explanation.
- Services Australia on the Disability Support Pension (DSP): The article mentions the DSP as a key financial tool. This official government page outlines the eligibility and function of the DSP for those with a long-term reduced work capacity due to illness.
- ASIC Moneysmart on Selling a Life Insurance Policy: This resource from the Australian Securities and Investments Commission explains viatical settlements (selling a policy), detailing the process and risks involved, as discussed in the options table.
- Australian Institute of Health and Welfare (AIHW) on Chronic Conditions: This report provides authoritative data on the prevalence and impact of chronic diseases in Australia, adding statistical weight to the significance of the problems discussed in the article.
- ASIC Moneysmart on Income Protection Insurance: This consumer guide explains how income protection works to provide an income stream, reinforcing its role in managing the financial 'marathon' of a chronic illness.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
