An individual who is terminally or chronically ill and lacks funds to cover
significant medical (e.g., experimental treatments) and other family expenses may
find the solution through his or her life insurance policies. Although insurance
policies have historically been held for the death benefits, some policies now
include an accelerated death benefit (or living benefit) rider. Where accelerated
death benefits are not an option, it may be possible to sell the life insurance
policy to a viatical settlement provider. Either way, individuals can secure some
much-needed cash while they are still living. Better yet, the proceeds will usually
The accelerated death benefit available is normally payable when certain conditions
are met and is usually a percentage of the face amount. The use of the proceeds is
typically not restricted to the payment of health costs. The cash value and face
value of the policy are reduced when the benefit is paid.
If the life insurance policy does not have such a rider, it may be possible to
negotiate with the insurance company to offer these benefits through a contractual
arrangement. The insurer may be willing to cooperate since total death benefits are
likely to be payable in the near future.
Viatication allows a terminally ill person to sell an existing life insurance policy
for more than its cash surrender value but less than its net death benefit to someone
who is buying it as an investment (i.e., the buyer continues to pay the premiums and
receives the life insurance proceeds upon the death of the insured). Many companies
currently either buy the policies themselves or serve as brokers to match buyers and
sellers for a fee.
In identifying a potential seller, many viatical companies limit their selection to
terminally ill individuals with a certain remaining life expectancy (e.g., 24 months
or less). This is because the company wants to minimize its risk that the individual
will outlive his or her life expectancy, resulting in a lower return from the
purchase of the life insurance policy for the company.
The insured must determine whether it would be advantageous to sell his or her policy,
considering (a) the individualâ€™s cash needs, (b) the discount in the value of the
death benefit, (c) the possibility the payments will disqualify the individual for
Medicaid benefits, and (d) access to the payments by the insuredâ€™s creditors. (The
cash value while it remains in a life insurance contract may not be subject to the
claims of creditors.)
Amounts received under a life insurance contract (i.e., accelerated death benefits) on
the life of terminally ill (or within limits, chronically ill) individuals are
excluded from gross income for federal income tax purposes. A similar exclusion
applies to the sale or assignment of any portion of a death benefit to a viatical
settlement provider if the insured is chronically or terminally ill and the payments
in question are funded by and diminish the life insurance policyâ€™s death benefit.
However, the exclusion does not apply if the accelerated death benefits are paid to
someone other than the insured individual if the recipient has a business or
financial relationship with the insured.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014