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f you have a terminal illnessor if you are caring for someone

who is terminally illchances are youre giving a great deal of

thought to time and money. You may be thinking about life

insurance, too. Its 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 policy holders

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 insurance 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 policys face

value. The viatical settlement company, in turn, may sell the policy to a thirdparty 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.

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 your friends and family as well as

to someone whose advice and expertise you can count ona lawyer, an accountant or a financial planner.

I

Viatical Settlements:

A Guide for People with Terminal Illnesses

vi-at-i-cal (vi-at-i-k l) adj. [Lat. viaticus < via, road.]

Of or relating to traveling, a road, or a way.
Facts for Consumers

Investigating Your Options

Many options exist for people with terminal

illnesses when financial needs are critical. For

example, you may consider a loan from someone such as the original beneficiary of your life

insurance policy. Or, if youve already ruled

out less expensive alternatives to raise cash,

you might sell your life insurance policy

through 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 vary with the policy.

If you own a life insurance policy, call your

state Insurance Commissioner or your

companys Claims Department to find out

about 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 policys

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, most viatical

companies will require that:

● youve owned your policy for at least two

years;

● your current beneficiary sign a release or a

waiver;

● you are terminally ill. Some companies

require a life expectancy of two years or

less, while others may buy your policy even

if your life expectancy is four years.

● you sign a release allowing the viatical

settlement provider access to your medical

records.

Most companies will require that the company

issuing your life insurance policy be financially

sound. If your life insurance policy is provided

by your employer, purchasers 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.

Financial Implications

Because the decision to sell your life insurance

policy is a very complex matter, you should

consult a tax advisor before doing so. Generally, if you sell your policy to a viatical settlement company, the proceeds are tax-free if you

have a life expectancy of less than two years.
Facts for Consumers

However, you still may owe state tax, although

a number of states, including New York and

California have made these settlements taxfree.

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.

In 1997, Congress changed the tax code so that

proceeds from accelerated benefits and viatical

settlements are tax-exempt. Under the law,

proceeds from accelerated benefits and viatical

settlements are tax-exempt as long as your life

expectancy is less than two years and the

viatical settlement company is licensedif you

live in a state that requires licensing. If your

state does not require viatical settlement companies to be licensed, state law will still require

that these companies meet other standards and

make certain other disclosures.

Most states have declared that payments of

accelerated benefits or viatical settlements are

exempt from state taxes. However, some states

do not give these payments tax-free status.

Because of the complexity of the situation, seek

professional tax advice from a lawyer, an

accountant or a financial planner.

Guidelines for Consumers

The daily physical and emotional demands of a

terminal illness can be overwhelming, and

financial burdens can seem insurmountable. If

you are considering making a viatical settlement on your life insurance policyor if you

are helping someone with this decisionthese

consumer guidelines should help you avoid

costly mistakes and make the choice thats

right.

● 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 80 percent of the face value of a policy

to a person whose life expectancy is six

months or less.

● 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.

● Dont fall for high pressure tactics. You

dont 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.

● 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.

● Insist that the company set up an escrow

account with a reputable, independent

financial institution before the company

sends the offer papers for your signature.

An escrow account will let you be sure that

the funds are available to cover the offer.

● Insist on a timely payment. Once the insurance company has made the necessary

changes, you should get your money within

two to three business days from the escrow

agent. No more than a few months should

go by from the initial contact with the

company to the closing. Check with your

state Attorney Generals office or department of insurance to see if there are complaints against the company before you do

business.

● Ask the company about possible tax consequences and implications for public assis-
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Facts for Consumers

tance 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.

● Ask about privacy. Some companies may

not protect a policyholders privacy when

they act as brokers for payouts from potential investors.

● 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

your friends and family as well as to someone

whose advice and expertise you can count on

a lawyer, an accountant or a financial planner.

You also may want to contact the following

organizations for more information.

American Council on Life Insurance

1001 Pennsylvania Avenue, NW

Washington, DC 20004-2599

National Association of Insurance

Commissioners

444 North Capitol Street, NW

Washington, DC 20001

www.naic.org

National Association of People with AIDS

1413 K Street, NW

Washington, DC 20005

National Viatical Association

1200 G Street, NW, Suite 760

Washington, DC 20005

www.nationalviatical.org

North American Securities Administrators

Association

555 New Jersey Avenue, NW

Washington, DC 20001

www.nasaa.org

Viatical Association of America

1200 19th Street, NW, Suite 300

Washington, DC 20036

www.cais.com/viatical

Your State Attorney General

Office of Consumer Protection

Your State Capital

Your State Insurance Commissioner

Department of Insurance

Your State Capital

The FTC works for the consumer to prevent

fraudulent, deceptive and unfair business

practices in the marketplace and to provide

information to help consumers spot, stop and

avoid them. To file a complaint, or to get free

information on any of 150 consumer topics,

call toll-free, 1-877-FTC-HELP (1-877-382-

4357), or use the complaint form at

www.ftc.gov. The FTC enters Internet,

telemarketing, and other fraud-related complaints into Consumer Sentinel, a secure,

online database available to hundreds of civil

and criminal law enforcement agencies worldwide.

Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer and Business Education

May 1998