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Comprehensive Life Insurance Payout Before Death Guide

Money Savings Advice Life insurance payout before death

When looking at different types of life insurance, many people will consider those with terminal illness cover. This means that if you develop a terminal illness, then your life insurance policy will pay out prior to your death.

It is very important to check the details of individual life insurance policies to see where you stand with regards to issues such as terminal illness.

Many people aren’t aware, but it is possible to receive a life insurance payout if the policyholder was to develop a terminal illness. This can obviously prove very useful in helping to cover any additional costs, income shortfalls and also restructuring finances to ensure your family is provided for after your death.

It is very dangerous to assume that all life insurance policies will have this condition written into the small print – check before signing.

Continue reading to get all the details about life insurance payouts.

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Why Would a Life Insurance Company Payout Before Death?

When an individual is diagnosed with a terminal illness, there is every chance that their life insurance policy will provide an early payout. This allows the individual to cover any short to a medium-term shortfall in income and also restructure their finances to ensure a degree of stability for their family on their death.

This is a life-changing situation which is appreciated by life insurance companies.

What Is the Timescale for a Terminal Illness?

Terminal illness cover relates to medical conditions where the individual has less than 12 months to live. Obviously, any request for early payment would require medical support to confirm the individual had been diagnosed with a terminal illness.


There are 14.4m people in the UK with a life insurance policy.

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Are Pre-Death Payments Paid Out Automatically?

The claims process regarding pre-death payments is similar to that for a beneficiary staking a claim after the death of the policyholder. The relevant supporting paperwork must be provided to the life insurance company at which point they would look to make a swift payment.

How Long Will I Wait for a Pre-Death Life Insurance Payment?

In the event that you are diagnosed with a terminal illness, as soon as the appropriate supporting documentation is provided, your insurance company would look to make a quick payment.

The life insurance company will be well aware that you may be facing financial challenges as a consequence of your terminal illness and the potential impact on household income.

What if a Life Insurance Holder Lives Longer Than 12 Months After a Payout?

Even if you were to live longer than 12 months after a terminal illness diagnosis, and you received a life insurance payout, you don’t have to pay the money back. In reality, the life insurance policy would have been closed after the terminal illness diagnosis payment.

Are There Occasions When a Life Insurance Policy May Not Payout on a Terminal Illness?

Assuming your life insurance policy also supports terminal illness cover, there are a few occasions, other than pre-diagnosed conditions, when a policy would not payout. However, you may find that terminal illness cover does not apply within the first 18 months of the policy.

This helps protect insurance companies from individuals taking out life cover when they suspect they may have a life-threatening condition.



What if My Life Expectancy Is More Than 12 Months?

This will vary from policy to policy, but in general, if you have a terminal illness diagnosis with a life expectancy of more than 12 months, the policy may not payout. This is by no means set in stone, and again it is very important to ask the question when arranging your life insurance.

Do All Life Insurance Policies Have a Terminal Illness Cover?

When you are looking at life insurance policies, it is very important to ask about terminal illness payments. While the majority of life insurance policies will have terminal illness cover, this should not be taken for granted.

If you were to incorrectly assume that terminal illness cover was part of your life insurance policy, there could be serious financial consequences.

Who Receives Life Insurance Payments Before Death?

Traditionally it is the policyholder who will receive any life insurance payment before their death. This will ensure they have additional funds to cover a potential income shortfall if they are unable to work and household income is seriously impacted. If the holder so wishes, part of the payment could be made to a third-party once they have received the payout.


Value of Total Benefits Paid on Long-Term Life and Annuities Insurance in the UK

This statistic presents the value of total benefits paid on long-term life and annuities insurance in the United Kingdom from 2005 to 2018. By the end of 2018, the total benefits paid on long-term life and annuities insurance decreased to approximately 18.3 billion British pounds.


Would I Pay Income/Capital Gains Tax on an Early Life Insurance Payout?

No. Under normal circumstances, there will be no income/capital gains tax to pay on an early life insurance payout unless it was part of a complicated trust scenario. If your life insurance policy is part of a trust arrangement, there may be tax consequences, and advice should be taken.

Are All Terminal Illnesses Covered With a Life Insurance Policy?

There are occasions where existing medical conditions, prior to taking out life insurance, will be excluded from your policy cover. This is likely to be the case with terminal illness cover although any unconnected medical conditions leading to a terminal illness would likely prompt an early payment.

It is very important that you are upfront and honest when answering medical-related questions associated with a life insurance policy.

Can I Add Terminal Illness Cover to My Life Insurance Policy?

In the event that a preferred life insurance policy does not include terminal illness cover, you may be able to add this as an optional extra. This would likely lead to an increase in your premiums but would offer peace of mind in the event that you were diagnosed with a terminal illness further down the line.


Total Household Spending on Life Insurances in the UK

This statistic shows the total household spending on life insurances in the United UK from 2000 to 2019. Over the time period the total amount of household expenditure spent on life insurance fluctuated, amounting to over 12 billion British pounds in 2019.


Do Death-in-Service Benefits Cover Terminal Illness?

It is quite possible that your employer death-in-service benefit will also have terminal illness cover, but again it is worthwhile asking the question. Obviously, if you were to leave employment, then your death-in-service benefits would cease.

Is Terminal Illness Cover Available to Everybody?

In theory, anybody can apply to have terminal illness cover added to their life insurance policy. However, those with pre-existing conditions may find it difficult or need to accept a cover with certain restrictions.

Would I | Pay Tax on My Life Insurance Payout Before Death?

No. It is very unlikely that you would pay tax on any insurance payout although there may be circumstances where perhaps a business has taken out insurance on an employee. If you have a non-standard scenario, then it may well be worth asking the question.

Would I Still Be Entitled to Benefits After Receiving an Early Life Insurance Payment?

There is no simple answer to this question. There are a number of benefits which are means-tested, therefore you might not be eligible, while others have no such conditions. You may also be entitled to an array of sickness benefits as a consequence of your illness and the impact on your life.

Unfortunately, many people are under the misunderstanding that upon receiving life insurance payments for a terminal illness, they are somehow precluded from claiming other benefits. If in doubt, ask the question.

Should I Take Advice About Taking Out Life Insurance?

We tend to find that people look at all types of insurance and their financial affairs under a different light. The reality is that insurance policies, especially life insurance, should be considered each time you undertake a financial review.

Whether you are looking to ensure loved ones are financially secure after your death, reorganising your debts and assets or simply undertaking a normal review, you should take everything into account. It can be very useful to ask a financial adviser to look over your affairs.


Money Savings Advice Tip

Life insurance is growing in popularity. Here at Money Savings Advice we recommend getting a whole market quote so you can see the monthly costs involved from all providers enabling you to make an informed decision.


Is It Worth Taking Out Terminal Life Insurance?

This is a very important question but certainly not a simple one to answer. If for example, your family had a history of a particular illness, then you might look towards terminal life insurance to ensure your loved ones are provided for.

The problem is, upon taking out terminal life insurance, you would need to complete a medical form which would no doubt ask about your family’s medical history. If you fill the form incorrectly, then this would likely have an impact on your premiums.

Will I Need to Take a Medical for Terminal Life Insurance?

When you take out a life insurance policy, you would not normally be asked to undertake a medical. However, there may be scenarios where, for example, your family have a hereditary condition or your medical records indicate a potential medical issue.

It will also depend upon the insurance company, and the level of payment insured. If you are unsure, it is sensible to take financial advice and put your mind at rest.

What if I Forget to Add a Medical Condition to My Terminal Life Insurance Questionnaire?

Unfortunately, ignorance or a simple error is not an excuse when it comes to terminal life insurance questionnaires. If you fail to disclose a medical condition, then this leaves the door open for the life insurance company to terminate your policy without notice.

Sometimes these discrepancies only emerge when looking to claim a terminal life insurance payment; therefore the financial impact can be both unexpected and huge. It is vital that you are totally honest and upfront when filling in your terminal life insurance questionnaire. Failure to do so could have a serious impact on your final few months and the financial security of your family.

Summary

The option of life insurance payouts before death will surprise many people, but for those suffering terminal illness, it makes perfect sense. Diagnosis of a terminal illness will likely have an impact on their income and that of their family. In turn, this could cause significant financial issues at an extremely challenging time in their life.

Quick Life Insurance FAQs


Joint life insurance is a popular form of life insurance whereby two individuals are named on the policy, but only one payment will be made. Irrespective of which party dies, life insurance will be paid out on the death of the first person then the policy will end. This ensures a degree of financial assistance for the surviving party.

If we assume that you have a capital repayment mortgage with 20 years to go, the mortgage liability will reduce as interest and capital is repaid month by month. Therefore, in this instance, it makes sense to look at decreasing term insurance where payment on death would follow the downward path of your mortgage liability.

As the life insurance payout would reduce the length, you live this gives scope for reduced premiums compared to traditional term insurance.

Term insurance is a type of life insurance policy which can be shaped around, for example, your mortgage term. Let us assume that you had 20 years to go on your interest-only mortgage; you could take out a 20-year life insurance policy which would cover the repayment of capital in the event of your death.

Limiting the length of the life insurance policy in this manner (as opposed to a whole of life policy) will reduce your premiums.

Whole of life cover is what you would expect; it guarantees payment to the named beneficiary no matter when you die. There are other types of life insurance policy which only pay out on death during a certain period. As a whole of life insurance has no fixed term, the premiums will be more expensive.

Under normal circumstances, life insurance payments will be released relatively quickly in the event of the death of the individual named on the policy. The immediate aftermath of the death of a loved one is traumatic in itself without additional financial pressures.

There are certain formalities to go through, such as confirmation of death, death certificate, but once the paperwork has been completed, the process should be relatively quick.

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How Can Money Savings Advice Help You With Life Insurance?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Life Insurance brokers. They have already helped thousands of people get the best Life Insurance cover and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Mark Benson

Mark has been writing professionally for over ten years for the financial sector. Having started in the financial world as a stock-broker in central London and then moving to equities trader Mark is one of our senior financial writers who has a vast knowledge of multiple financial sectors.

Mark Benson

Mark has been writing professionally for over ten years for the financial sector. Having started in the financial world as a stock-broker in central London and then moving to equities trader Mark is one of our senior financial writers who has a vast knowledge of multiple financial sectors.

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