Insurance Planning: Viatical Settlements (Module 10)
How is property classified?
Real property and personal property
Assignment Provision
allows ownership rights in life insurance policies to be transferred by the current owner to another person
Real Property
if the ownership rights are associated with land and objects permanently attached to land, such as buildings
Personal Property
if the ownership rights concern movable property, such as automobiles, furniture, stocks and insurance policies
Collateral Assignment
is a temporary transfer of only some policy ownership rights to another person. Collateral assignments are ordinarily used, in connection with loans from banks or other lending institutions and persons
Accelerated Death Benefit
Policy provision that allows full or partial payment of the policy's death benefit before the insured's death if he/she is terminally ill. This rider is chosen at the time of purchasing life insurance or most insurers allow you to add this on at any time
Absolute Assignment
is the complete transfer, by the existing policy owner of all of his or her rights in the policy to another person
A policy owned by a corporation on the life of a key employee may be sold for an amount ________ to its cash surrender vale to the employee upon employment termination
Equal
The viatical settlement firm's offer depends on what?
- the policy face amount - the insured's life expectancy - likely future premium payments that the firm will make - outstanding policy loans - prevailing interest rates
Mr. Land is terminally ill. He has a whole life contract with a death benefit of $1,000,000. The cash value of the contract is $100,000. He paid a premium of $50,000 (dividends were used to reduce the premium). If he sells the policy for $600,000 to a viatical company, what will be the tax result? a. $600,000 will be tax-free. b. $550,000 will be tax-free ($600,000 less $50,000 in premiums paid). c. $400,000 ($1,000,000 less $600,000) will be tax-free. d. $500,000 will be tax-free ($600,000 less $100,000 CV).
A The viatical company's basis is $600,000 which come to the company tax-free. The $400,000 will be subject to ordinary income.
What is considered satisfactory evidence that an insuerer may request to provide proof of terminal illness?
- Hospital or nursing home records - Certification by a physician - Medical examination paid for by insurer
What percentage of the policies face value would a viatical settlement firm normally offer?
50-80%
Lillian, terminally ill, sells her $100,000 policy to a viatical company for $40,000. What amount of gain must she report if she paid $30,000 of premiums? a. $0 b. $60,000 c. $10,000 d. $70,000 e. $40,000
A The gain is always zero no matter what the cash value, premium paid, or the payment made by the viatical company.
Living Benefit: What is the normal payout for terminal illness coverage?
It is typically 25-50% of the face amount. Some companies do permit full policy face amount if the insured has 6 months or one year to live
What do property ownership rights include?
Rights of possession, rights of control and rights of disposition
Choses in Possession
ownership rights by tangible objects, such as jewels or cars
What is the process of viatical settlements?
1. Diagnosis of Terminal Illness 2. Settlement Offer 3. Cash Payment - Sells insurance policy for cash payment 4. Beneficiary - Viatical settlement firm becomes beneficiary 5. Premium Payment - Viatical settlement firm continues to pay premiums 6. Death Proceeds - Viatical settlement firm collects death proceeds when insured dies
Bob wants to sell his life insurance policy to a viatical company. Does he have to prove to the company that he is terminally ill to get the proceeds federal income tax-free? a. No, the sale of the policy is automatically tax-free. b. Yes, the viatical company must justify the purchase of the policy to their investors. c. Yes, he must be certified by a physician as having a condition that can be reasonably expected to result in death within 24 months of certification. d. No, the sale is just a return of his cash and unused premium.
C Viatical companies typically require the insured to sign a release allowing the viatical company access to the applicant's medical records to provide assurance of life expectancy.
How are viatical settlements taxed to the viator?
It is tax free as long as the life expectancy of the viator is two years or less
What are illnesses that qualify as catastrophic illnesses?
- Coronary artery surgery - Heart attack - Renal failure - Stroke - Cancer
Accelerated Death Benefit is also referred to as living insurance. What are the two forms of living insurance?
- Terminal Illness Coverage - Catastrophic Illness Coverage and Dread Disease Coverage
What are the pricing guidelines from the Viatical Settlement Model Act?
- life expectancy of 24 months or more = 50% - life expectancy of less than 6 months = 80%
Viatical Settlement Model Act requires that certain disclosures be made to the viator. What are they?
- the impact of the transaction on eligibility for government benefits - Possible tax implications - Rescission rights - Alternatives to viatical settlements
Paul has an incurable disease and a maximum life expectancy of 2 years. He would like to live out his remaining days seeing the world. He has a life insurance policy with a death benefit of $500,000 and $40,000 of cash value. A viatical settlement company has offered him $325,000 in cash. If he sells the policy and the viatical company pays 8 more premiums of $4,000 each before Paul dies, which of the following is true? 1. The $325,000 paid to Paul is received tax-free. 2. $285,000 ($325,000 paid less $40,000 cash value) is taxable. 3. The $500,000 death benefit is tax-free to the viatical. 4. $357,000 of the death benefit is tax-free to the viatical.
1, 4 When the $500,000 is paid as a death benefit to the viatical company, the company's basis in the policy is $357,000 ($325,000 + $32,000). The difference of $143,000 is taxed as ordinary income to the viatical company.
Arrange the following events in the correct sequence. A. Henry was diagnosed with a fatal form of cancer. B. Henry purchased a life insurance policy. C. Henry received cash payment from the viatical settlement firm. D. Henry approached a viatical settlement firm and sold his life insurance to them. E. The viatical settlement firm received the death proceeds of Henry's life insurance policy from the insurance company. F. Henry died. G. The viatical settlement firm continued paying Henry's life insurance premiums.
Correct Answer: B. Henry purchased a life insurance policy. A. Henry was diagnosed with a fatal form of cancer. D. Henry approached a viatical settlement firm and sold his life insurance to them. C. Henry received cash payment from the viatical settlement firm. G. The viatical settlement firm continued paying Henry's life insurance premiums. F. Henry died. E. The viatical settlement firm received the death proceeds of Henry's life insurance policy from the insurance company. Explanation: Henry purchased a life insurance policy when he was 25 years old and was diagnosed with a fatal form of cancer when he was 33. He approached a viatical settlement firm and sold his life insurance to them in exchange for cash payment. The firm continued paying his life insurance premiums. A year later, upon Henry's death, the viatical settlement firm claimed the death proceeds of his life insurance policy from the insurance company.
Viatical Settlement Firm
a specialized company, or group of investors, that purchase life insurance policies from terminally ill individuals for lump sum cash payment. It is a private enterprise and not considered an insurance company
Choses in Action
ownership rights by something tangible but not having a value of itself like an insurance policy
Catastrophic Illness Coverage
provides for accelerated death benefit payments on approximately the same terms and conditions as terminal illness coverage. The difference is the insured must have been diagnosed as having one of the several listed catastrophic illnesses
