Use of Life Insurance

quiz

Question 1 Which of the following would provide instant liquidity upon the death of an estate owner? the estate owner's home bank certificates of deposit *a life insurance policy on the owner's life, payable to his estate real estate owned by the owner for investment purposes An investment with liquidity is easily converted into cash. Life insurance policies with cash accumulation features offer liquidity, as do policies that are payable at death to the insured's estate. In this case, the only asset with instant liquidity is the life insurance policy. The other assets cannot be easily converted into cash. Question 2 Depending on a person's individual needs, life insurance can provide both death benefits and living benefits. People commonly purchase life insurance for all of the following reasons EXCEPT *to save money to purchase a first home to protect survivors against the income lost when an insured dies to preserve an estate to create an estate People most commonly use life insurance to protect survivors against the income lost when an insured dies. Question 3 What is another name for the insured in a viatical settlement? viatical settlement broker viatical settlement provider viatical settlement purchaser *viator The insured in a viatical settlement is also known as the viator. Question 4 Fred is terminally ill. He sells his $100,000 life insurance policy to a viatical settlement provider for $60,000. Six months later, Fred dies. Which of the following statements is correct? The death benefit will be split equally between the viatical settlement provider and Fred's estate. Fred's estate will receive $100,000 as a death benefit. Fred's estate will receive $60,000 as a death benefit under the policy, and the viatical settlement provider will receive $40,000. *The viatical settlement provider will receive the entire $100,000. Under a viatical settlement, the insured sells his or her interest in a life insurance policy to a viatical settlement provider, who becomes the policyowner and beneficiary. When Fred dies, the provider receives the full death benefit. Fred's estate will not receive any part of the death benefit when he dies. Question 1 Frank intends to use his life insurance to make the down payment on a vacation home. In so doing, Frank is using which of the following? *living benefits insurable interest death benefits business insurance Depending on the type of policy, life insurance can also provide funds out of cash values for use during the insured's lifetime. This feature is called living benefits. Frank can use his policy's "living benefits" for such purposes as making a down payment on a vacation home or meeting a financial emergency. Question 2 After a viatical settlement agreement is signed, which party owns the life insurance policy? the viatical settlement broker the viator the viatical settlement purchaser *the viatical settlement provider A viatical settlement provider is the organization that acquires the life insurance policy from the viator. It owns the policy after the viatical settlement agreement is signed and receives the proceeds at the insured's death. Question 3 Tim has been diagnosed with terminal cancer and has been given one year to live. To carry out his last wish of traveling to Tahiti, he would like to sell his life insurance policy through a viatical settlement. Which of the following statements is most correct? If Tim enters into a viatical settlement, he must continue paying policy premiums. If Tim enters into a viatical settlement, he will receive only about 30 to 40 percent of the policy's death benefit. Tim can use the funds from a viatical settlement only to pay medical expenses or other debts. *Tim can enter into a viatical settlement to gain a substantial portion of the policy's face amount, provided the policy has been in force beyond the contestability period. If Tim enters into a viatical settlement, he can use the funds for whatever purpose he wants, including to take a trip. Question 4 A whole life insurance policy accumulates cash value as it matures. When does this value equal the policy's death benefit? when the policy has been in force for at least 20 years *when the insured reaches age 120, under most policies when the insured dies when the insured stops making premium payments The cash value of a permanent life insurance policy typically does not equal the policy's death benefit when the insured dies before policy maturity (typically age 120)

viatical settlement purchaser

is an investor who funds a viatical settlement on behalf of the viatical settlement provider

Viatical Definitions

Viator -The viator is the policyowner who is selling the policy to a viatical settlement provider in a viatical settlement.

Use of Life Insurance: Overview

Life insurance has a wide range of both personal and business uses. Knowing how a customer plans to use life insurance helps the producer decide which policy to suggest and how to structure it. This unit explores the most common personal and business uses of life insurance.

for test

-accelerated benefit rider --accelerated benefit pays 50-80% of death benefit ---insured retains policy ownership and can designate beneficiary ---beneficiary gets remainder at insured's death(assuming policy has been maintained) -Viatical settlement -- VS provider buys the policy from the insured for 50-80% of death benefit ---VS provider becomes owner and beneficiary --- Beneficiary gets nothing at insured's death

Regulatory Status

The Health Insurance Portability and Accountability Act (HIPAA) provides an income tax exemption for funds distributed through a viatical settlement when the policy is sold to a qualified viatical settlement provider. The income tax treatment of viatical settlements at the state level varies. Some states treat them as tax-free transactions, while others do not.

Viatical Settlement Broker

Working on behalf of the viator, the viatical settlement broker arranges the agreement between the viatical settlement provider and viator. Most states require such brokers to be licensed.

Viatical Settlement Contract

The Fraudulent Viatical Settlements Act establishes the minimum standards for viatical settlement contracts, which it defines as a written agreement establishing the terms under which compensation or anything of value will be paid in return for the viator's assignment, transfer, sale, or bequest of the death benefit or complete ownership of a life insurance contract.

Create an Estate

Life insurance is a financial vehicle that can create an instant estate. In this context, an estate is all that a person owns at the time of death. Upon the insured's death, a specified sum of money is immediately made available to a named beneficiary or the insured's estate—money that can be used for any purpose. For example, proceeds can be used to -cover the costs or taxes the estate may face upon death; -provide an inheritance for heirs named in a will; and -make a charitable gift.

Viatical Settlement Provider

The viatical settlement provider is the person that acquires the life insurance policy from the viator. The viatical settlement provider owns the life insurance policy after the viatical settlement agreement is signed. The provider is also the beneficiary who receives the proceeds when the insured dies. As the new policyowner, the provider must pay the premiums on the policy while the insured lives. This keeps the policy in force, a necessary requirement when it comes time to collect the death benefit. Most states require that all viatical settlement providers be licensed.

Key Points

-Life insurance is a financial vehicle that can create an instant estate. -The policy cash value is available to the policyowner through a policy loan, withdrawal (in the case of a universal life insurance policy), or surrender, and it may be used for virtually any purpose. -Withdrawing the cash value from the policy will result in a reduction in the death benefit. -Life insurance proceeds are paid directly to the policy's beneficiaries and are exempt from the claims of creditors. -The purpose of a viatical settlement is to provide a chronically or terminally ill insured a sum of money that might be needed to pay medical expenses or to enhance quality of life. -To avoid any appearance that the life settlement involves stranger-originated life insurance (STOLI), which is illegal in many states, life settlement providers typically require that the policy being purchased be past its contestability period.

Terminally Ill or Chronically Ill

A key provision of a viatical settlement is that the insured must be diagnosed as terminally ill or chronically ill. A person who has a life expectancy of no more than 48 to 60 months is generally considered terminally ill for purposes of a viatical settlement. The viatical settlement provider determines life expectancy based principally on the insured's medical records. A person is considered chronically ill if he or she needs long-term care assistance with at least two activities of daily living. A licensed health care practitioner must certify that this condition has existed for at least 90 days within the previous 12 months.

Fraudulent Practices

As defined in the act, prohibited fraudulent practices (by a viatical broker or provider) include -presenting, or preparing to be presented, false material information about the proposed viatical settlement or concealing material information as part of the application, underwriting, or claim for payment under a viatical settlement; -removing, concealing, altering, destroying, or hiding from the Commissioner the assets or records of a licensee or other person engaged in the business of viatical settlements; -embezzling, stealing, or misappropriating funds, premiums credits, or other property of any party to a viatical settlement; and -recklessly entering into a viatical settlement contract by presenting false information or concealing material information about the proposed viatical settlement (recklessly means engaging in this conduct with a conscious and clearly unjustifiable disregard of the relevant facts or risks, and a gross deviation from acceptable standards of conduct).

Financial Security

Life insurance provides financial security to individuals and their families. More important, it provides peace of mind. Wage earners who buy insurance on their lives enjoy peace of mind in knowing that surviving family members are taken care of in the event of their death. Likewise, workers who build cash value in a policy to use at retirement feel greater financial security knowing there will be funds available to supplement their retirement income. -Exemption from Creditors Insureds find comfort in knowing their life insurance proceeds are paid directly to the policy's beneficiaries and are exempt from the claims of creditors. This protection is provided through the policy's spendthrift clause.

Survivor Protection

People buy personal life insurance most often to protect survivors against the loss of income resulting from the insured's death. Survivors are typically the named beneficiaries of a life insurance policy. They are usually family members who need the instant money from a death benefit to meet their immediate and long-term financial needs. Common needs that survivors face and that life insurance can help meet are -providing income to meet daily living expenses; -retiring a mortgage on the survivor's home; -setting up an education fund for the children of the decease; -paying off existing debts; and -paying death expenses, such as medical and funeral costs.

Viatical Settlements

--Sale of the rights and benefits in an existing life insurance policy to an investor; when a terminally ill person transfers ownership of a life insurance policy to another in return of payment of some amount less than the policy's death benefit. In the past several decades, insurers have started making it possible for policyowners to tap into the policy death benefit when facing a terminal illness or permanent disability requiring long-term care. One way to do this is through the accelerated death benefits provision that is common with permanent life insurance policies today. Another way is through a viatical settlement. The purpose of a viatical settlement is to provide a chronically or terminally ill insured a sum of money that might be needed to pay medical expenses or to enhance quality of life. It can provide terminally or chronically ill people a timely method for receiving needed funds--usually within 30 to 45 days after the settlement agreement has been signed. To achieve this, the policyowner sells the life insurance policy to a third party, known as a viatical settlement provider. The viatical settlement provider buys the policy for a sum of money, typically ranging from 50 to 80 percent of the death benefit. The viatical settlement provider then becomes the policyowner and is thereafter responsible for paying the premiums. In turn, the viatical settlement provider receives the full death benefit when the insured dies. In most cases, viatical settlements are available only to people whose policies are beyond the contestable period.

Life Settlements

Similar to a viatical settlement is the life settlement. Like a viatical settlement, a life settlement involves the sale of an existing permanent life insurance policy for more than its cash value but less than its death benefit. However, unlike a viatical settlement, a life settlement does not require the insured to be terminally or chronically ill. Instead, the only qualification requirement with a life settlement is that the insured must typically be at least 65 years old. Life settlement providers serve as the purchaser in a life settlement transaction. As the new policyowner, they are responsible for all future premiums and designate themselves as beneficiary. To avoid any appearance that the life settlement involves stranger-originated life insurance (STOLI), which is illegal in many states, life settlement providers typically require that the policy being purchased be past its contestability period.

Accumulate Cash for Living Benefits

As permanent life insurance policies mature, they accumulate a cash value that represents a "living benefit" to the policyowner. The longer the whole life insurance policy stays in force, the greater its cash value. The policy cash value is available to the policyowner through a policy loan, withdrawal (in the case of a universal life insurance policy), or surrender, and it may be used for virtually any purpose. Common "living benefit" uses for a life policy's cash value include -paying for a child's college education; -supplementing retirement income; and -serving as a source of funds in an emergency. It is crucial that policyowners understand that the cash value is also an integral part of the policy's death benefit and that withdrawing the cash value from the policy will result in a reduction in the death benefit

Liquidity

Liquidity refers to the ease with which an asset can be converted to cash. Permanent life insurance policies are recognized as very liquid assets. The ease and relative lack of expense with which one may obtain the cash value is the key to permanent life insurance's "living benefits."

Viatical Settlement Disclosure Requirements

With each application for a viatical settlement, a viatical settlement provider or viatical settlement broker must provide the viator with at least the following disclosures no later than at the time the application for the viatical settlement contract is signed by all parties: -an explanation that there are possible alternatives to a viatical settlement -an explanation that some or all of the proceeds of the viatical settlement may be taxable -an explanation that proceeds of the viatical settlement could be subject to the claims of creditors -an explanation that receipt of viatical settlement proceeds may adversely affect the viator's eligibility for Medicaid -an explanation that the viator has 15 calendar days after receipt of the viatical settlement proceeds to rescind the contract

Estate Conservation

Besides being a way to create an estate, life insurance is a useful way to preserve an estate. This makes life insurance extremely popular with people who have substantial assets. A policy's death benefit reduces or eliminates the need to sell assets to pay estate taxes, other costs, or debts the estate may face upon a person's death. In this way, life insurance conserves the estate. It allows the estate to be passed intact to the deceased's heirs. -Avoids Probate Life insurance is popular in estate planning not just because it provides a sum of money exactly when it's needed. When the beneficiary designation is properly established, death benefit payments bypass the probate process and are made directly to the named beneficiary. This makes it possible to set up special cash bequests that are outside the terms of an insured's will.

Fraudulent Viatical Settlements Act

To help assure consumers that they will not be mistreated in viatical settlements, in 2001 the National Association of Insurance Commissioners (NAIC) adopted the Fraudulent Viatical Settlements Model Act. Most states today have adopted some version of that model act. The Fraudulent Viatical Settlements Model Act codifies the rules by which viatical settlements may be advertised, sold, or set up. Among its key provisions, the act -requires viatical settlement brokers and providers to first obtain a state-issued license before engaging in any viatical settlement activity; -defines fraudulent practices that are prohibited in the process of transacting a viatical settlement; -identifies minimum disclosure requirements that must be presented to consumers before a viatical settlement may be transacted; -establishes advertising guidelines pertaining to viatical settlements; -stipulates that if the insured dies during the rescission period, the settlement contract will be deemed to have been rescinded, or cancelled (and, assuming the beneficiary returns settlement funds to the viatical provider, the full original life insurance contract will be payable to the beneficiary); and -requires that interested consumers be provided with an NAIC brochure that describes the process of viatical settlements