AIDS NEWS SERVICE Michael Howe, MSLS, Editor AIDS Information Center VA Medical Center, San Francisco (415) 221-4810 ext 3305 Jaunary 19, 1996 Viatical Settlements: A Guide for People with Terminal Illnesses Federal Trade Commission 6th Street and Pennsylvania Avenue, N.W. Washington, D.C. 20580 If you have a terminal illness--or if you are caring for someone who is terminally ill--chances are you're giving a great deal of thought to time and money. You may be thinking about life insurance, too. It's in that context that you may hear the phrases accelerated benefits and viatical settlements. Accelerated benefits sometimes are called "living benefits." They are the proceeds of life insurance policies that are paid by the insurer to policyholders before they die. Occasionally, these benefits are included in policies when they are sold, but usually, they are offered as riders or attachments to new or existing policies. Viatical settlements involve the sale of a life insurance policy. If you have a terminal illness, you may consider selling your policy to a viatical settlement company for a lump sum cash payment. In a viatical settlement transaction, people with terminal illnesses assign their life insurance policies to viatical settlement companies in exchange for a percentage of the policy's face value. The viatical settlement company, in turn, may sell the policy to a third-party investor. The viatical settlement company or the investor becomes the beneficiary to the policy, pays the premiums, and collects the face value of the policy after the original policyholder dies. The fact is that any decisions affecting life insurance benefits can have a profound financial and emotional impact on dependents, friends, and care-givers. Before you make any major changes regarding your policy, talk to someone whose advice and expertise you can count on--a lawyer, an accountant, or a good friend. Investigate Your Options Options exist for people with terminal illnesses when financial needs are critical. For example, you may consider a loan from the original beneficiary or your life insurance policy, accelerated benefits on your life insurance policy, or a viatical settlement. Many life insurance policies in force nationwide now include an accelerated benefits provision. Companies offer anywhere from 25 to 100 percent of the death benefit as early payment, but policyholders can collect these payments only under very specific circumstances. The amount and the method of payment may vary with the policy. Indeed, if you own a life insurance policy, call your insurance agent or company to find out about your alternatives. Ask whether your life insurance policy allows for accelerated benefits or loans, and how much it will cost. Some insurers add accelerated benefits to life insurance policies for an additional premium, usually computed as a percentage of the base premium. Others offer the benefits at no extra premium, but charge the policyholder for the option if and when it is used. In most cases, the insurance company will reduce the benefits advanced to the policyholder before death to compensate for the interest it will lose on its early payout. There also may be a service charge. In addition, you may consider selling your life insurance policy to a viatical settlement company, a private enterprise that offers a terminally ill person a percentage of the policy's face value. It is not considered an insurance company. The viatical settlement company becomes the sole beneficiary of the policy in consideration for delivering a cash payment to the policyholder and paying the premiums. When the policyholder dies, the viatical settlement company collects the face value of the policy. Viatical settlements are complex legal and financial transactions. They require time and attention from physicians, life insurance companies, lawyers, and accountants or financial planners. The entire transfer process can take up to four months to complete. Eligibility for Viatical Settlements Each viatical settlement company sets its own rules for determining which life insurance policies it will buy. For example, viatical settlement companies may want to know that: o you've owned your policy for at least two years; o your policy has a reasonably large face value; o you have a waiver from current or potential beneficiaries; and o you are terminally ill. Usually, this means that death is expected to occur within two years. Investors may insist that your policy be from a company that is large or will-known and one that will be able to pay the death benefit. If your life insurance policy was provided by your employer, investors also will want to know if it can be converted into an individual policy or otherwise be guaranteed to remain in force before it can be assigned. Finally, investors probably will ask you to release all your medical records to them. Financial Implications If you sell your policy to a viatical settlement company, you may owe federal capital gains tax on the difference between the payment you receive and the amount you've paid in premiums. You also may owe state tax, although several states, including California and New York, have made these settlements tax-free. Collecting accelerated benefits or making a viatical settlement also may affect your eligibility for public assistance programs based on financial need, such as Medicaid. The federal government does not require policyholders either to choose accelerated benefits or cash in their policies before qualifying for Medicaid benefits. But once the policyholder cashes in the policy and receives a payment, the money may be counted as income for Medicaid purposes and may affect eligibility. The Congress is currently considering a proposal to change the tax code so that accelerated benefits and viatical settlements would be excluded from taxes. Your lawyer or accountant will be able to tell you the tax status of these payments. Up to now, payments of accelerated benefits from an insurance company have been tax-exempt in some states. Because viatical settlement companies are not considered insurance companies, viatical payments generally have not been exempt from taxes in most states. Guidelines for Consumers The daily physical and emotional demands of a terminal illness can be over-whelming, and financial burdens can seem insurmountable. If you are considering making a viatical settlement on your life insurance policy--or if you are helping someone with this decision--these consumer guidelines should help you avoid costly mistakes and make the choice that's right. o Contact two or three viatical settlement companies to make sure offers are competitive, and be aware of prevailing discount rates. A viatical settlement company may pay 60 percent of the face value of a policy to a person whose life expectancy is two years or less, and 80 percent to someone who life expectancy is six months or less. o Check with your state insurance department to see if viatical settlement companies or brokers must be licensed. If so, check the status of the companies with whom you are considering doing business. o Don't fall for high pressure tactics. You don't have to accept an offer, and you can change your mind. Some states require a 15-day cooling off period before any viatical settlement transaction is complete. o Verify that the investor or the company has the money for your payout readily available. Large companies may have cash on hand; smaller ones may have uneven cash flows or may be "shopping" the policy to third parties. o Ask the company to set up an escrow account with a reputable financial institution at the beginning of the transfer so you can be sure the funds are available to cover the offer. o Insist on a timely payment. No more than a few months should elapse from the initial contact with the company to closing. Check with your state attorney general's office or department of insurance to see if there are complaints against the company before you do business. o Ask the company about possible tax consequences and implications for public assistance benefits. Some states require viatical settlement companies to make these disclosures and tell you about other options that may be available from your life insurance company. o Contact a lawyer to check on the possible probate and estate considerations. If you make a viatical settlement, there will be no life insurance benefits for the person you originally designated as beneficiary. For More Information Any decision that affects your life insurance benefits can affect the people who care for and about you. Before you make a decision, talk to someone you trust--a lawyer, an accountant, or a good friend. You also may want to contact the following organizations for more information. Affording Care 429 E. 52nd Street, Unit 4-G New York City, NY 10022-6431 American Council of Life Insurance 1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2599 National Association of Insurance Commissioners 444 North Capitol Street, N.W. Washington, D.C. 20001 National Association of People With AIDS 1413 K Street, N.W. Washington, D.C. 20005 National Viatical Association 7910 Woodmont Avenue, Suite 1430 Bethesda, MD 20814 North American Securities Administrators Association 555 New Jersey Avenue, N.W. Washington, D.C. 20001 Viatical Association of America 1200 19th Street, N.W., Suite 300 Washington, D.C. 20036 Your State Attorney General Office of Consumer Protection Your State Capital Your State Insurance Commissioner Department of Insurance Your State Capital The Federal Trade Commission (FTC) FTC is an independent agency that seeks to protect the public against unfair, deceptive, and fraudulent advertising and marketing practices through law enforcement and education efforts. For a complete list of free FTC publications write: Best Sellers, Public Reference, Federal Trade Commission, Washington, D.C. 20580, (202) 326-2222. For TDD, call (202) 326- 2502. Or use the internet for on-line access to FTC consumer and business publications. The FTC ConsumerLine is located on the internet at CONSUMER.FTC.GOV or through the World Wide Web at http://www.ftc.gov