Purpose: Little has been determined regarding the association between patients’ and families’ illness understanding and preferences for medical care. We aimed to evaluate the association of illness understanding with advance care planning (ACP) and preferences for end-of-life care, such as aggressive care, early palliative care (EPC), and hospice care, among advanced cancer patients and their family caregivers. Methods: Patients were recruited for a prospective cohort study at outpatient and inpatient facilities in nine university hospitals in Korea (n = 150), and their primary family caregivers were also asked to participate (n = 101). Data on ACP and end-of-life care preferences were collected only at baseline in the cohort study with optional questions and were used to analyze these study results. Results: Patients with illness understanding were more likely to have documented physician orders for life-sustaining treatment (POLSTs) (adjusted odds ratio [aOR] of 4.94) and to have discussed ACP with their families (aOR 2.15) than those who did not. Being expected to live for several months, they were unlikely to prefer active treatment. Caregivers understanding patients’ illness were more likely to write advance directives (ADs) and to discuss ACP; furthermore, they had already discussed ACP with family members. They did not prefer active treatment or life-sustaining treatments when their family members were expected to die within a few weeks. There was no significant association between illness understanding and preferences for EPC. Conclusion: Accurately recognizing an incurable disease is associated with preferences for more ACP and less aggressive care but not with preferences for EPC or hospice care among both advanced cancer patients and their family caregivers.