Contemplation of death is difficult. Most of us fear C the unknown of our own death and for the financial security of those we leave behind. Life insurance is the vehicle we most often use to provide that financial security. It is paid when our loved ones need it the most in a lump sum or an annuity. Moreover, it usually is income tax-free and, if appropriately structured, can escape any estate taxes.
However, what if we were subject to a fatal illness where there was almost a certainty of non-recovery@ To prolong any sort of life, astronomical medical expenses would be incurred. Many chronically or terminally ill individuals with short life expectancies have sold or assigned their life insurance policies to what are known as viatical settlement providers. These companies typically buy policies from people with life-threatening illnesses for a percentage of the policy's face value.
In the past, viatical settlement payments were subject to Federal income taxes. Life insurance proceeds normally would not be taxable because they would be received and paid by reason of death. Since viatical life insurance payments would not be paid by reason of death, they would be taxable. Accordingly, people opted not to use viatical settlements because they did not want a significant part of their money going to the Internal Revenue Service.
This has all been changed by the Health Insurance Portability and Accountability Act, signed into law by Pres. Clinton on Aug. 21, 1996. It allows those suffering from chronic and life-threatening illnesses to receive the proceeds of living benefits in the form of viatical settlements free of any Federal income taxes. After Dec. 31, 1996, viatical settlement companies will be able to pay out a percentage of the policy's face value to the policyholder, assume responsibility for premium payments, and become the policy's beneficiary. Moreover, there are no restrictions on the use of the funds received from viatical settlements. This means the policyholder need not use the money for medical purposes, a final vacation or new car could be an acceptable purchase.
According to a Congressional joint conference committee, a "chronically ill" individual is one who has been certified within the previous 12 months by a licensed health practitioner as being unable to perform (with substantial assistance) at least two of daily living chores - eating, dressing, toileting, transferring, and continence - for at least 90 days as a result of loss of functional capacity; or having a similar level of disability as determined by the Secretary of Health and Human Services; or requiring substantial supervision to protect such individual from threats to health and safety as a result of severe cognitive impairment.
In the case of the chronically ill, there is a $175-per-day ($63,875 annual) cap on excludable benefits that applies for per diem-type long-term care insurance contracts. The cap was instituted during the final stages of the legislation because Congress recognized the need to coordinate long-term care provisions with viatical settlements. If there were no cap, there would be little to no incentive to purchase a long-term care policy.
This cap can be avoided easily. Under the law, chronically ill individuals may enter into a viatical settlement arrangement that is structured to indemnify the individual for any long-term care expenses. As a result, amounts spent for long-term care expenses could be deducted from the full amount of viatical proceeds, thereby allowing an individual to exceed the $175-per-day or $63,875 annual cap.
A terminally ill individual, meanwhile, is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within months of the date of certification.
The National Association of Insurance Commissioners, Viatical Settlements Model Act outlines guidelines for fair payments to policyholders. These standards compare the minimum percent@ age of face value the ill individual can receive, less outstanding loans, to the insured's life expectancy.
Those with less than six months to live would be guaranteed 80% of the policy's face value, while those with at least six, but less than 12, months would be guaranteed 70%. If the insured is expected to survive at least 12, but less than 18, months, 65% would be granted, and if life expectancy is at least 18, but less than 24, months, 60% would be the minimum. After 24 months, the return for selling the insurance policy starts at 50%.
Those most likely to reap the benefits of the new law's living benefits provisions are individuals with chronic and life-threatening illnesses such as cancer, heart disease, Alzheimer's disease, and acquired immune deficiency syndrome. According to Amy Anderson, legislative representative for AIDS Action, HIV and AIDS have very expensive treatments and someone may become impovished and end up on public assistance. Viatical settlements will keep them from relying on public assistance and ... the person with more money can have a better standard of life for what time they have left." It has been estimated that 22% of individuals between the ages of 65 and 74, and 25% To of those over the age of 75, lose most or all of their family savings as a result of serious illness.
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