Viatical Settlements

Definition of terminally ill

individual must be certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months or less ** if viator meets this definition, all proceeds of a viatical settlement are income tax free great benefit to the terminally ill viator in dire need of the money

Living insurance

insured person is entitled to receive benefits while he/she is still living-- in contrast to general life insurance that usually pays benefits upon the death of the insured 2 forms: terminal illness coverage catastrophic illness coverage and dread disease coverage

Settlement requirements

viatical settlement firm requires certification from a physician that the individual's condition can reasonably be expected to result in death within a certain time period, though any life insurance policy or certificate can be used if the offer is accepted, policyowner transfers ownership to the firm via an absolute assignment

Viatical settlements

cash payments made to individuals who sell their life insurance for a substantial percentage of the death benefit provide an alternative to surrendering the policy for its cash value

Terminal illness coverage

pays an amount, if the insured is diagnosed as having a terminal illness amount is a specified maximum percentage-- typically 25 to 50%, of the life insurance policy's face amount some companies will permit acceleration of the full policy face amount—most provisions require the insured have a maximum of either 6 months or 1 year to live

Absolute assignment

the complete transfer by the existing policy owner of all of his/her rights in the policy to another person-- change of ownership

Assignments

transfer of the ownership rights of life insurance policies from the policy owner to another person are referred to as assignments 2 types: absolute assignments collateral assignments

Viatical Settlement Model Act

created by the NAIC due to concerns over possible abuse of viatical settlement transactions requires that certain disclosures be made to the viator: the impact of the transaction on eligibility for government benefits possible tax implications rescission rights, and alternatives to viatical settlements Act also covers the licensing of viatical firms and brokers, and offers guidelines that establish minimum prices as a percentage of the policy death benefit disclosures under Act: government benefits tax implications rescission rights other alternatives

Accelerated death benefits

allows the early withdrawal of death benefits in cases where insured are terminally ill rider involves the payment of a portion of a life insurance policy's face amount before the insured's death because of some specified, adverse medical condition of the insured

Viatical settlement firms

purchase life insurance from individuals who have terminal illnesses, thereby providing the individual with needed funds

Process of viatical settlement

1) diagnosis of terminal illness 2) settlement offer-- viatical settlement firm makes a settlement offer amount 3) cash payment-- viator (policy owner) sells his policy in exchange for cash payment 4) beneficiary-- viatical settlement firm becomes the beneficiary to the policy 5) premium payment-- viatical settlement firm continues paying the life insurance premium on the policy 6) death proceeds-- upon death of the viator, viatical settlement firm receives the death proceeds from the insurance company

Viatical settlement firm

a specialized company, or group of investors, that purchases life insurance policies from terminally ill individuals for a lump sum cash payment private enterprise and not considered an insurance company people with terminal illnesses assign their life insurance policies to viatical settlement companies in exchange for a percentage of the policy's face value firm or the investor becomes the beneficiary to the policy also pay the premiums and collect the face value of the policy after the original policyholder dies

Settlement offer amount

policy owner usually offered anything between 50 and 80% of the face value of the policy offer amount depends primarily on: the policy face amount and the insured's life expectancy firm offers less for shorter life expectancy other considerations: likely future premium payments, outstanding policy loans, and prevailing interest rates

Catastrophic illness coverage

provides for accelerated death benefits on approximately the same terms and conditions as terminal illness coverage—difference is the insured must have been diagnosed as having one of several listed illnesses: stroke, heart attack, cancer, coronary artery surgery, and renal failure

Transfer for value rule

sometimes life insurance policy is sold for a valuable consideration in this case death benefit amount that exceeds the new policy owner beneficiary's adjusted basis is subject to income tax at ordinary income rates when the insured dies adjusted basis includes the amount he/she paid for the policy and the amount of the premium he/she paid as the new owner

Exceptions to the transfer for value rule

will not cause the death benefit to be subject to income taxes at the insured's death occurs when the policy is transferred to the following individuals/entities: insured insured's partner transferor's spouse incident to a divorce new owner who takes the transferor's basis in the contract to a partnership in which the insured is a partner to a corporation in which the insured is a shareholder or officer

Collateral assignment

a temporary transfer of only some policy ownership rights to another person ordinary used in connection with loans from or other lending institutions and persons temporary-- transferred partial rights revert to the policyowner upon debt repayment assignee (lending institution) obtains the right to: collect the proceeds at maturity, surrender the policy pursuant to its terms, obtain policy loans, receive dividends, and exercise and receive benefits of nonforfeiture rights policyowner retains the right to: collect any disability benefits, change the beneficiary, and elect optional modes of settlement assignee agrees to: pay the beneficiary any proceeds in excess of the policyowner's debt, not to surrender or obtain a loan from the insurance company unless there is default on the debt or premium payments, and forward the policy to the insurer for endorsement of any change of beneficiary or election of settlement option