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19 - 1 Accelerated Death Benefits and Viatical Settlements PowerPoint PPT Presentation

Accelerated death benefit payments from the insurance companies issuing the policies ... death benefits. Living needs benefit. Acceleration-of-life-insurance ...

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19 - 1 Accelerated Death Benefits and Viatical Settlements

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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • What is it?

    • Life insurance policy have several options to address

      • Increase medical expenses associated with

        • Terminal illness such as cancer or aids

        • Chronically debilitating illnesses

      • Viatical settlements with independent third parties

      • Accelerated death benefit payments from the insurance companies issuing the policies

    • Viatical settlements

      • Third party purchases the life insurance policy of the insured (the viator)

      • The insured receives a one time payment usually between 50% to 80% of the policies face value

      • The purchaser then becomes the owner and beneficiary of the policy

        • They receive the proceeds when the insured dies


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • What is it? (cont'd)

    • Viatical settlements (cont'd)

      • Most purchasers require the insured to have a life expectancy of two years or less

    • Accelerated death benefits

      • Provision that require the insurers to prepay a portions of the death benefit to the insured

        • Insured has a disabling or life threatening condition

        • Doctor predict that will cause death within a relatively short period of time

      • Other names for this option

        • Accelerated death benefits

        • Living needs benefit

        • Acceleration-of-life-insurance benefit

        • Living payout option


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • When the use of such a device indicated?

    • When a person is terminally ill or chronically ill

    • Person is in need of cash

    • Other options to meet those cash needs are not available

  • Advantages

    • Payments received income tax free

    • Proceeds can be used for any purpose desired

      • Out of pocket medical expenses

      • Finance alternative medical treatments not covered by existing medical coverage

      • Finance dream vacation or purchase car

      • Personally distribute cash to loved ones

      • Pay off loans

      • Maintain dignity by not dying destitute


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Disadvantages

    • Reduced total payout

      • Accepting accelerated death benefit reduces benefits payable to the beneficiaries

    • Eligibility for government assistance programs

      • Creditors may be able to reach proceeds paid to a living insured

      • Policy containing this provision should not be considered a replacement for health insurance or long term care insurance

      • It is possible for dishonest persons to take advantage of a terminally ill or chronically ill person who receives a large sum of money

      • Insured may be venerable to charlatans claiming they can cure the ailment or scam artists who promise large returns on the insured newly gained wealth


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • What are the requirements?

    • Terminally ill

      • Certified by a physician

      • Illness or physical condition that can be reasonable expected to result in death in less than 24 months

    • Chronically ill

      • Certified by a licensed health care practitioner

        • Unable to perform at least 2 activities of daily living (eating, toileting, bathing, dressing, transferring and continence)

        • Having a level of disability to the level of disability as described above

        • Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment

    • A person cannot be both chronically ill and terminally ill


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Types of life insurance policies

    • Not all policies qualify for preferred treatment under accelerated benefits

    • Policy must meet the definition of life insurance under IRC 7702

      • Cash Value Accumulation Test (CVAT) or

      • Guideline Premium / Cash Value Corridor test (GPT)

    • Accelerated payments made to someone other than the taxpayer under a key person and other business policies are not protected

  • Limitations on payments to Chronically ill individuals

    • Must be reimbursements for the costs of qualified long term care services

    • Unlike terminally ill insured’s, they do not have the discretion to use benefits in whatever manner they desire


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Limitations on payments to Chronically ill individuals

    • Must be reimbursements for the costs of qualified long term care services

    • Unlike terminally ill insured’s, they do not have the discretion to use benefits in whatever manner they desire

    • To qualify for favorable tax treatment

      • Contract may not reimburse expenses incurred that are reimbursable under Title XVIII of the social security act (Medicare)

  • Additional rules

    • IRC limits the exclusion for payments to chronically ill persons to $250 per day (2006) which equals $91,250 per year


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Additional rules (cont'd)

    • Viatical Settlements

      • Payments must be made by a Viatical Settlement Provider

      • Provider must be licensed to provide Viatical Settlements under the laws of the state in which the insured resides

      • Provider must meet the requirements

        • Sections 8 an 9 of the Viatical Settlements Modal Act

        • Model Regulations of the National Association of Insurance Commissioners

  • Selecting the best policy

    • First investigate prospective insurers

      • Good track record

      • Solvency rating

      • Eligibility requirements

      • How will the accelerated payments affect the policies overall death benefit?


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Selecting the best policy

    • First investigate prospective insurers

      • Good track record

      • Solvency rating

      • Eligibility requirements

    • How will the accelerated payments affect the policies overall death benefit?

    • Insurance companies vary as to which illnesses will trigger the payment of the benefit

      • Some use any type of terminal illness

      • Others restrict benefits to specific types of deceases

        • Examples - Aids, heart attack, stroke, renal failure, Alzheimer's, liver transplant

      • Some companies restrict availability to those with less than 12 months to live


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Selecting the best policy (cont'd)

    • Amount payable varies to between 2% and 95% of the death benefits

    • Payments received

      • One lump sum or

      • Regular installments or

      • Installments based on the insured’s expenses

    • Other issues

      • Can the benefits be stopped before all installments received

        • Leave more death proceeds to the beneficiaries

      • What happens if the benefit installments cease before the insured dies

      • Carriers may restrict the use of benefits received

        • They can only be used on medical care


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Selecting the best policy (cont'd)

    • Other issues (cont'd)

      • What options are available if the insured dies before receiving all the installments

        • Are remaining payments forfeited

        • Will the payments continue on to the beneficiary

        • Will the beneficiary receive a death benefit adjusted for the accelerated payments

    • General rule

      • Accelerated death benefits pay a higher amount than do Viatical Settlements, but typically impose a greater number of restrictions on medical conditions


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Tax Implications

    • HIPAA (1996)

      • Included an express provision excluding payments from Viatical Settlements and Accelerated death benefits from gross income

    • Requirements to escape taxation

      • Terminally ill

        • Certified by a physician

        • Illness or physical condition that can be reasonable expected to result in death in less than 24 months

        • Not included within the class of people who qualify as chronically ill


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Tax Implications

    • Requirements to escape taxation (cont'd)

      • Chronically ill

        • Certified by a licensed health care practitioner

          • Unable to perform at least 2 activities of daily living (eating, toileting, bathing, dressing, transferring and continence)

          • Having a level of disability to the level of disability as described above

          • Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment

        • Exclusion only applies if payments are made for costs incurred by the payee for qualified long term care services

        • Must not be a payment or reimbursement for expenses reimbursable under Medicare


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Tax Implications

    • Transfer For Value Rule

      • IRC 101(a)(2)

        • In the case of transfer for valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income . . . . shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee

      • Virtually all transfers to a Viatical Settlement Company fall within the transfer for value rule

        • The death benefit the Viatical Settlement Company receives will be taxable income to them, to the extent the proceeds exceed what they paid for the policy plus any subsequent premiums

      • Exceptions to the transfer for value rule

        • To the insured

        • To the partner of the insured

        • To a partnership in which the insured is a partner

        • To a corporation in which the insured is a shareholder or officer


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Ethics

    • Planners need to protect the client who may be contemplating entering into a Viatical Settlement or filing for accelerated death benefits

    • Use a reputable Viatical Settlement broker

      • Broker’s generally charge 3% to 6% of the payout

      • Provider must be licensed in the state the insured resided

    • Ask the insured what public assistance, if any they are receiving

      • Viatical Settlements could cause those benefits to be lost

    • Receive written assurance that all medical records of the insured will remain confidentially and will not be shared without the insured's written permission


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Alternatives

    • Borrow against cash values

      • Advantages

        • Policy will pay the full death benefit less any loans taken

        • Policyholder will not have to repay the loan while living

        • Loan proceeds will generally be free of income tax (if the policy is properly structured)

      • Disadvantages

        • Amount borrowed less than what could be received from an accelerated death benefit or Viatical settlement

    • Surrender the policy

      • Surrender value less than death benefit

      • Amounts received in excess of basis are taxable


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Accelerated Death Benefits and Viatical Settlements

Chapter 19

Tools & Techniques of Life

Insurance Planning

  • Alternatives

    • Borrow from a third party

      • Friends, family members, possible the beneficiary

        • Receive repayment from the insurance policy

      • Securing the loan

        • Lender with an unsecured note run the risk that other claimants have a higher priority and therefore there may be insufficient assets to repay the note

        • Note should be secured with specific collateral

      • Using the policy as collateral

        • May trigger the transfer for value rule

        • Consider transactions using the exceptions to the transfer for value rule

          • Partners of the insured, partnerships of which the insured is a partner etc


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