19 - 1 Accelerated Death Benefits and Viatical Settlements

1. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • What is it? • Life insurance policy have several options to address • Increase medical expenses associated with • Terminal illness such as cancer or aids • Chronically debilitating illnesses • Viatical settlements with independent third parties • Accelerated death benefit payments from the insurance companies issuing the policies • Viatical settlements • Third party purchases the life insurance policy of the insured (the viator) • The insured receives a one time payment usually between 50% to 80% of the policies face value • The purchaser then becomes the owner and beneficiary of the policy • They receive the proceeds when the insured dies

2. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • What is it? (cont'd) • Viatical settlements (cont'd) • Most purchasers require the insured to have a life expectancy of two years or less • Accelerated death benefits • Provision that require the insurers to prepay a portions of the death benefit to the insured • Insured has a disabling or life threatening condition • Doctor predict that will cause death within a relatively short period of time • Other names for this option • Accelerated death benefits • Living needs benefit • Acceleration-of-life-insurance benefit • Living payout option

3. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • When the use of such a device indicated? • When a person is terminally ill or chronically ill • Person is in need of cash • Other options to meet those cash needs are not available • Advantages • Payments received income tax free • Proceeds can be used for any purpose desired • Out of pocket medical expenses • Finance alternative medical treatments not covered by existing medical coverage • Finance dream vacation or purchase car • Personally distribute cash to loved ones • Pay off loans • Maintain dignity by not dying destitute

4. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Disadvantages • Reduced total payout • Accepting accelerated death benefit reduces benefits payable to the beneficiaries • Eligibility for government assistance programs • Creditors may be able to reach proceeds paid to a living insured • Policy containing this provision should not be considered a replacement for health insurance or long term care insurance • It is possible for dishonest persons to take advantage of a terminally ill or chronically ill person who receives a large sum of money • Insured may be venerable to charlatans claiming they can cure the ailment or scam artists who promise large returns on the insured newly gained wealth

5. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • What are the requirements? • Terminally ill • Certified by a physician • Illness or physical condition that can be reasonable expected to result in death in less than 24 months • Chronically ill • Certified by a licensed health care practitioner • Unable to perform at least 2 activities of daily living (eating, toileting, bathing, dressing, transferring and continence) • Having a level of disability to the level of disability as described above • Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment • A person cannot be both chronically ill and terminally ill

6. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Types of life insurance policies • Not all policies qualify for preferred treatment under accelerated benefits • Policy must meet the definition of life insurance under IRC 7702 • Cash Value Accumulation Test (CVAT) or • Guideline Premium / Cash Value Corridor test (GPT) • Accelerated payments made to someone other than the taxpayer under a key person and other business policies are not protected • Limitations on payments to Chronically ill individuals • Must be reimbursements for the costs of qualified long term care services • Unlike terminally ill insured’s, they do not have the discretion to use benefits in whatever manner they desire

7. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Limitations on payments to Chronically ill individuals • Must be reimbursements for the costs of qualified long term care services • Unlike terminally ill insured’s, they do not have the discretion to use benefits in whatever manner they desire • To qualify for favorable tax treatment • Contract may not reimburse expenses incurred that are reimbursable under Title XVIII of the social security act (Medicare) • Additional rules • IRC limits the exclusion for payments to chronically ill persons to $250 per day (2006) which equals $91,250 per year

8. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Additional rules (cont'd) • Viatical Settlements • Payments must be made by a Viatical Settlement Provider • Provider must be licensed to provide Viatical Settlements under the laws of the state in which the insured resides • Provider must meet the requirements • Sections 8 an 9 of the Viatical Settlements Modal Act • Model Regulations of the National Association of Insurance Commissioners • Selecting the best policy • First investigate prospective insurers • Good track record • Solvency rating • Eligibility requirements • How will the accelerated payments affect the policies overall death benefit?

9. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Selecting the best policy • First investigate prospective insurers • Good track record • Solvency rating • Eligibility requirements • How will the accelerated payments affect the policies overall death benefit? • Insurance companies vary as to which illnesses will trigger the payment of the benefit • Some use any type of terminal illness • Others restrict benefits to specific types of deceases • Examples - Aids, heart attack, stroke, renal failure, Alzheimer's, liver transplant • Some companies restrict availability to those with less than 12 months to live

10. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Selecting the best policy (cont'd) • Amount payable varies to between 2% and 95% of the death benefits • Payments received • One lump sum or • Regular installments or • Installments based on the insured’s expenses • Other issues • Can the benefits be stopped before all installments received • Leave more death proceeds to the beneficiaries • What happens if the benefit installments cease before the insured dies • Carriers may restrict the use of benefits received • They can only be used on medical care

11. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Selecting the best policy (cont'd) • Other issues (cont'd) • What options are available if the insured dies before receiving all the installments • Are remaining payments forfeited • Will the payments continue on to the beneficiary • Will the beneficiary receive a death benefit adjusted for the accelerated payments • General rule • Accelerated death benefits pay a higher amount than do Viatical Settlements, but typically impose a greater number of restrictions on medical conditions

12. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Tax Implications • HIPAA (1996) • Included an express provision excluding payments from Viatical Settlements and Accelerated death benefits from gross income • Requirements to escape taxation • Terminally ill • Certified by a physician • Illness or physical condition that can be reasonable expected to result in death in less than 24 months • Not included within the class of people who qualify as chronically ill

13. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Tax Implications • Requirements to escape taxation (cont'd) • Chronically ill • Certified by a licensed health care practitioner • Unable to perform at least 2 activities of daily living (eating, toileting, bathing, dressing, transferring and continence) • Having a level of disability to the level of disability as described above • Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment • Exclusion only applies if payments are made for costs incurred by the payee for qualified long term care services • Must not be a payment or reimbursement for expenses reimbursable under Medicare

14. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Tax Implications • Transfer For Value Rule • IRC 101(a)(2) • In the case of transfer for valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income . . . . shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee • Virtually all transfers to a Viatical Settlement Company fall within the transfer for value rule • The death benefit the Viatical Settlement Company receives will be taxable income to them, to the extent the proceeds exceed what they paid for the policy plus any subsequent premiums • Exceptions to the transfer for value rule • To the insured • To the partner of the insured • To a partnership in which the insured is a partner • To a corporation in which the insured is a shareholder or officer

15. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Ethics • Planners need to protect the client who may be contemplating entering into a Viatical Settlement or filing for accelerated death benefits • Use a reputable Viatical Settlement broker • Broker’s generally charge 3% to 6% of the payout • Provider must be licensed in the state the insured resided • Ask the insured what public assistance, if any they are receiving • Viatical Settlements could cause those benefits to be lost • Receive written assurance that all medical records of the insured will remain confidentially and will not be shared without the insured's written permission

16. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Alternatives • Borrow against cash values • Advantages • Policy will pay the full death benefit less any loans taken • Policyholder will not have to repay the loan while living • Loan proceeds will generally be free of income tax (if the policy is properly structured) • Disadvantages • Amount borrowed less than what could be received from an accelerated death benefit or Viatical settlement • Surrender the policy • Surrender value less than death benefit • Amounts received in excess of basis are taxable

17. Accelerated Death Benefits and Viatical Settlements Chapter 19 Tools & Techniques of Life Insurance Planning • Alternatives • Borrow from a third party • Friends, family members, possible the beneficiary • Receive repayment from the insurance policy • Securing the loan • Lender with an unsecured note run the risk that other claimants have a higher priority and therefore there may be insufficient assets to repay the note • Note should be secured with specific collateral • Using the policy as collateral • May trigger the transfer for value rule • Consider transactions using the exceptions to the transfer for value rule • Partners of the insured, partnerships of which the insured is a partner etc